what is risk neutral 
risk neutral is a concept used in both game theory studies and in finance it refers to a mindset where an individual is indifferent to risk when making an investment decision this mindset is not derived from calculation or rational deduction but rather from an emotional preference a person with a risk neutral approach simply doesn t focus on the risk regardless of whether or not that is an ill advised thing to do this mindset is often situational and can be dependent on price or other external factors understanding the concept of risk neutralrisk neutral is a term used to describe the attitude of an individual who may be evaluating investment alternatives if the individual focuses solely on potential gains regardless of the risk they are said to be risk neutral such behavior to evaluate reward without thought to risk may seem to be inherently risky a risk averse investor would not consider the choice to risk a 1000 loss with the possibility of making a 50 gain to be the same as risking only 100 to make the same 50 gain however someone who is risk neutral would given two investment opportunities the risk neutral investor only looks at the potential gains of each investment and ignores the potential downside risk risk neutral pricing and measuresthere could be any number of reasons why an individual would reach a risk neutral mindset but the idea that an individual could actually change from a risk averse mindset to a risk neutral mindset based on pricing changes then leads to another important concept that of risk neutral measures risk neutral measures have extensive application in the pricing of derivatives because the price where investors would be expected to exhibit a risk neutral attitude should be a price of equilibrium between buyers and sellers individual investors are almost always risk averse meaning that they have a mindset where they exhibit more fear over losing money than the amount of eagerness they exhibit over making money this tendency often results in the price of an asset finding a point of equilibrium somewhat below what might be accounted for by the expected future returns on this asset when trying to model and adjust for this effect in marketplace pricing analysts and academics attempt to adjust for this risk aversion by using these theoretical risk neutral measures example of risk neutralfor example consider a scenario where 100 investors are presented and accept the opportunity to gain 100 if they deposit 10 000 in a bank for six months there is virtually no risk of losing money unless the bank itself were in danger of going out of business then suppose those same 100 investors are subsequently presented with an alternative investment this investment gives them the opportunity of gaining 10 000 while accepting the possibility of losing all 10 000 finally suppose we poll the investors over which investment they would choose and give them three responses a i d never consider that alternative b i need more information about the alternative investment c i ll invest in the alternative right now in this scenario those who responded a would be considered risk averse investors and those who responded c would be considered risk seeking investors since the investment value is not accurately determinable with only that much information however those who responded with b recognize that they need more information to determine whether they would be interested in the alternative they are neither adverse to risk nor seeking it for its own sake instead they are interested in the value of expected returns to know whether or not they prefer to take the risk so at the moment they seek more information they are considered risk neutral such investors would probably want to know what the probability of doubling their money might be in comparison to possibly losing it all if the probability of doubling were only 50 then they could recognize that the expected value of that investment is zero since it has an equal possibility of losing everything or doubling if the probability of doubling were to shift to 60 then those who were willing to consider the alternative at that point would have adopted a risk neutral mindset because they were focused on the probability of gain and no longer focused on the risk the price at which risk neutral investors manifest their behavior of considering alternatives despite the risk is an important point of price equilibrium this is a point where the greatest number of buyers and sellers may be present in the market 