Jensens Inequality
For a concave function f, the expected value of f(X) is less than or equal to f of the expected value of X. Applied to utility theory it means the expected utility of a random outcome is always lower than the utility of the expected outcome -- the gap is the cost of uncertainty. Jensen's inequality is the mathematical foundation of risk-averse decision-making: it explains why investors pay for insurance, accept lower returns for safety, and hold precautionary cash buffers against income variability.
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Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
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