Her Motivation Is Based On Her Analysis That There Is Greater Potential For

Her motivation is based on her analysis that there is greater potential for increased return, the higher the risk. The more risk loving the individual, the more unfavourable must be the chances of the investment yielding a profit for her not to invest. For example, some people will choose to bet on a non-league club, e.g. Nuneaton Borough FC defeating Liverpool in the FA Cup instead of the other way round because the payout returns if their bet materialises will be considerably more than if they were to bet on a Liverpool victory these are risk lovers.
We shall now turn our attention back to Charles who has an investment decision to make. Remember that Assets A and B both had the same expected return of £10k while the risk of Asset B was greater than that of Asset A. Assuming that the costs of both investments were the same and that utility is based on the satisfaction to be gained from returns, Charles should make the following decisions based on his attitude to risk.
4.1Risk Lover
Charles should opt for Asset B. Demonstrating this attitude means that Charles' preference is influenced by the possibility of increased returns. In other words, increases in returns, in equal increments will add more and more to utility. For example, the more profits of £5k that Charles makes, the more he is satisfied or his utility increases. Charles' attitude or risk preference means his marginal utility increases for any additional increments in returns. This is represented in the diagram below.

Utility

Figure 2 Risk Lover and UtilityReturns
The extra utility to be gained from a return of £12k for example, in Asset B is more than the utility given up if Charles loses £12k. Based on this, Charles the risk lover will choose Asset B.
4.2Risk Neutral
Because expected returns are identical, Charles will be indifferent to investing on either Asset A or B. For Charles, the risk neutral investor, successive equal increases in returns will yield the same level of utility. Similarly, the utility to be gained from a £12k return is the same as the utility sacrificed for a £12k loss, i.e. equal marginal utility.
Utility

Figure 3 Risk Neutral and UtilityReturns

4.3Risk Averse
Charles, the risk averse investor will opt for Asset A. This is because for the same expected return as Asset B, the risk of achieving this is less. In this case, increases in returns, in equal increments will add less and less to utility. As Charles attains more incremental returns, his utility decreases decreasing or diminishing marginal utility. Additionally, he will not opt for Asset B due to the possibility of the negative return. The utility that Charles gains from a £12k return is less than the utility sacrificed for a £12k loss.
In general, most people are risk averse. To prove this, it is useful to consider human behaviour with regards to insuring their homes.