Daniel Bernoulli proposed that a mathematical function of probability should be used to correct the expected value, accounting for risk aversion, where the risk premium is higher for low-probability events than the difference between the payout level of a particular outcome and its expected value.
A mathematical function of probability should be used to correct the expected value. This was accounting for risk aversion. This was what Daniel Bernoulli proposed. The risk premium is higher for low-probability events than the difference between the payout level of a particular outcome. The risk premium is higher for low-probability events than the difference between the payout level of its expected value.