Bernoulli's Hypothesis

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. Overreaction

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

    A hypothesis stating that individuals make investment decisions ...
  6. Informationally Efficient Market

    A theory, which moves beyond the definition of the efficient ...
Related Articles
  1. Trading

    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. ETFs & Mutual Funds

    Efficient Market Hypothesis: Is The Stock Market Efficient?

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

    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. Managing Wealth

    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. Markets

    Trust In Utilities

    Even in times of economic turmoil, utilities can be a good investment.
  10. Investing

    Value Investing: Common Alternatives To Value Investing

    There are dramatic differences in the ways different types of investors make their investment decisions. In this section, we'll look at some of the most common investment philosophies and see ...
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. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center