DEFINITION of 'Bernoulli's Hypothesis'

Hypothesis proposed by mathematician Daniel Bernoulli that expands on the nature of investment risk and the return earned on an investment. Bernoulli stated that an investor's acceptance of risk should incorporate not only the possible losses that can occur, but also the utility, or intrinsic value, of the investment itself.

Also known as the "expected utility hypothesis".

BREAKING DOWN 'Bernoulli's Hypothesis'

Related closely to the idea of diminishing marginal returns, Bernoulli's hypothesis essentially states that one should not accept a highly risky investment choice if the potential returns will provide little utility, or value. A young investor who still has his or her highest income-earning years ahead can be expected to accept greater investment risk, as the potential returns could be very valuable compared to such a person's relative lack of wealth. On the other hand, a retired investor with ample savings already in the bank should not be looking for a highly volatile or risky investment, as the potential benefits are unlikely to be worth the risk.

RELATED TERMS
  1. Hypothesis Testing

    A process by which an analyst tests a statistical hypothesis. ...
  2. Null Hypothesis

    A type of hypothesis used in statistics that proposes that no ...
  3. Type II Error

    A statistical term used within the context of hypothesis testing ...
  4. P-Value

    The level of marginal significance within a statistical hypothesis ...
  5. Overreaction

    A market hypothesis stating that investors and traders react ...
  6. Adaptive Expectations Hypothesis

    A hypothesis stating that individuals make investment decisions ...
Related Articles
  1. Investing

    Hypothesis Testing in Finance: Concept & Examples

    When you're indecisive about an investment, the best way to keep a cool head might be test various hypotheses using the most relevant statistics.
  2. Investing

    What is a Null Hypothesis?

    In statistics, a null hypothesis is assumed true until proven otherwise.
  3. Investing

    How Statistical Significance is Determined

    If something is statistically significant, it’s unlikely that it happened by chance.
  4. Investing

    Efficient Market Hypothesis

    An investment theory that states it is impossible to "beat the market".
  5. Investing

    Efficient Market Hypothesis: Is The Stock Market Efficient?

    Deciding whether it's possible to attain above-average returns requires an understanding of EMH.
  6. Financial Advisor

    Are Low-Risk High-Yield Investments Real? (DIA)

    Risk and reward necessarily move in the same direction. Or do they? Is it possible to defy logic and earn great returns while putting little on the line?
  7. Investing

    Low Vs. High-Risk Investments For Beginners

    Understanding risk is key to better investing.
  8. Investing

    Where to Invest Your Money? 10 Steps to Financial Success

    Learn where to invest your money ten steps. Included is how to develop a proper investment plan, different investment products and brokerage options.
  9. Insights

    Trust In Utilities

    Even in times of economic turmoil, utilities can be a good investment.
RELATED FAQS
  1. What does a strong null hypothesis mean?

    Find out what null hypothesis is and why it is important to the scientific method. See how statisticians and economists use ... Read Answer >>
  2. Has the Efficient Market Hypothesis been proven correct or incorrect?

    Explore the efficient market hypothesis and understand the extent to which this theory and its conclusions are correct or ... Read Answer >>
  3. What are the differences between weak, strong and semi-strong versions of the Efficient ...

    Discover how the efficient market theory is broken down into three versions, the hallmarks of each and the anomalies that ... Read Answer >>
  4. What is the relationship between confidence inferrals and a null hypothesis?

    Learn about the relationship between confidence intervals and the null hypothesis in scientific research and empirical experimentation. Read Answer >>
  5. What does the efficient market hypothesis assume about fair value?

    Found out what the efficient market hypothesis says about the fair value of securities, and learn why technical and fundamental ... Read Answer >>
  6. What are some of the limitations of only looking at the rate of return for an investment?

    Learn why only reviewing the rate of return for an investment poses a risk to the investor and what additional factors should ... Read Answer >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center