The significance of this is unmistakable.  Be our psychology what it may, however deep and irrepressible our taste for derring-do, however inadequate the scope which the dull routine of modern life affords for our adventurous impulses, we are most of us anxious to avoid the risk of great financial loss.  We are very glad to find someone to take it off our shoulders if we can; so glad that we are prepared to pay him for the service, to pay him a sum which covers not only the actuarial equivalent of the risk, but something substantial over and above.  In this we are entirely rational.  Our conduct is justified by the law of the diminishing utility of money, which was noted at the end of Chapter III.  It would be plainly foolish, for instance, to substitute for the certainty of an income of $2500 per annum an even chance of $5000 or nothing, since the utility to us of $5000 is not twice as great as that of $2500.

The majority of business risks are not of a kind against which it is possible to insure.  Insurance companies confine themselves to risks which are mainly a matter of what we call objective rather than subjective chance, i.e. risks in respect of which knowledge of detailed facts peculiar to the individual case is of minor importance.  But such knowledge is of paramount importance in the case of ordinary business risks.  If, for example, a new enterprise is to be undertaken, the special knowledge and experience which its promoters possess is a vital factor in determining their estimate of the risk involved.  An outsider with no special knowledge would necessarily require to estimate the risk far more highly if we were to form a rational opinion on the basis of his knowledge.  So great, indeed, would be the risk to him, that we can lay it down as a sound maxim that people are extremely rash who invest their money in risky undertakings about which they know very little.  This subjective aspect of business risk has a significance to which it will be necessary to revert.

But, though most business risks are not and cannot be a matter for premiums and policies, the principle, which the practice of insurance illustrates, applies none the less.  In the light of their knowledge and experience, the promoters of a new undertaking must weigh up the chances of failure and success, though they will not do so by the precise methods of an actuary.  They will require that any chances of serious loss should be balanced by such chances of exceptional gain, as would raise the expectation of profit well above the normal return on secure investments.  The more risky the project seems the greater, generally speaking, must be the expectation of profit required to induce people to undertake it.