According to traditional finance, individuals are characterized as which of the following?

Individuals are typically characterized as risk averse in traditional finance. This principle posits that investors prefer to avoid risk when possible, and they require a higher expected return to compensate for taking on additional risk. The reasoning is grounded in the idea that individuals value potential gains less than they fear potential losses. Therefore, given two investments with the same expected return, the one with less risk is generally preferred.

Risk aversion is crucial for many financial theories and models, including the Capital Asset Pricing Model (CAPM) and the efficient frontier in Modern Portfolio Theory, where the goal is to create a portfolio that maximizes expected return while minimizing risk. Investors with a risk-averse profile will typically invest in lower-risk assets to preserve capital and ensure steady growth, making decisions that reflect a preference for certainty over uncertainty.