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Ineconomics andfinance,risk neutral preferences arepreferences that are neitherrisk averse norrisk seeking. A risk neutral party's decisions are not affected by the degree of uncertainty in a set of outcomes, so a risk neutral party is indifferent between choices with equal expected payoffs even if one choice is riskier.
In the context of thetheory of the firm, a risk neutral firm facing risk about the market price of its product, and caring only about profit, would maximize the expected value of its profit (with respect to its choices of labor input usage, output produced, etc.). But a risk averse firm in the same environment would typically take a more cautious approach.[1]
Inportfolio choice,[2][3][4] a risk neutral investor who is able to choose any combination of an array of risky assets (various companies' stocks, various companies' bonds, etc.) would invest exclusively in the asset with the highestexpected yield, ignoring its risk features relative to those of other assets. In contrast, a risk averse investor woulddiversify among a variety of assets, taking account of their risk features, even though doing so would lower the expected return on the overall portfolio. The risk neutral investor's portfolio would have a higher expected return, but also a greater variance of possible returns.
Choice under uncertainty is often characterized as the maximization ofexpected utility. Utility is often assumed to be a function of profit or final portfolio wealth, with a positive firstderivative. The utility function whose expected value is maximized isconcave for a risk averse agent,convex for a risk lover, and linear for a risk neutral agent. Thus in the risk neutral case, expected utility of wealth is simply equal to the expectation of a linear function of wealth, and maximizing it is equivalent to maximizing expected wealth itself.