According to the basic valuation model,
The equation (1) shows total value as discounted present worth of future profits where
future profits are and i is the risk free rate of return. By adjusting the total value with risk free rate of return i, time value of money is explicitly accounted for.
Risk averse investors are the ones who aim to minimize the risk. Thus risk averse investors demand for higher risk premium to adjust for the high risk involved in the investment projects.
Risk averse investors have a low expectation of a higher payoff and generally expect a constant payoff with a minimum standard deviation. Thus the risk averse investors prefer lower as opposed to higher coefficients of variation.
Risk neutral investors place a maximum value on a project exactly equal to their expected rewards. Therefore, certain sums and expected risky sums of equal dollar amounts are valued equally by risk neutral investors.
Risk-seeking investors are the ones with increasing marginal utility of money, because increase in their wealth increases the utility of that wealth more than proportionately and thus they are aggressive investors.
Risk neutral investors place a value on project exactly equal to the expected returns, irrespective of variability in returns due to risk involved.
Investment in form of lottery tickets is a risky investment and Any expected risky amount can be converted to an equivalent certain sum using the certainty equivalent adjustment factor, a, calculated as the ratio of a certain sum divided by an expected risky amount, where both dollar values provide the same level of utility.
Since for every dollar invested in lottery tickets return is only 50 percent, therefore
This gives the adjustment factor 1, which accounts for the risk preferring behavior of the lottery buyers. This suggests that for small dollar amounts many consumers are risk-seeking in their behavior and hence lotteries are gaining the popularity.