Learning Bayesian Statistics Bitesize | How To Model Risk Aversion In Pricing?
Mar 4, 2026
Daniel Saunders, an applied Bayesian researcher in pricing optimization, walks through how to model risk aversion in price-setting using exponential utility. He explains why uncertainty grows at high prices. He shows how adding a risk parameter shifts recommendations toward safer, lower-price choices with tighter profit distributions.
AI Snips
Chapters
Transcript
Episode notes
Prices Have Asymmetric Uncertainty
- Price points show asymmetric uncertainty in expected profit across the demand curve.
- Low prices produce tight, predictable returns while high prices yield much wider variance because small changes in purchases hugely affect profit.
Use Diminishing Utility To Model Risk
- Diminishing-returns utility functions capture risk preferences by reducing marginal value of extra profit.
- Exponential utilities are common in economics because they saturate as money increases, modeling people who value additional profit less at high wealth.
Optimize Expected Utility Not Expected Profit
- Pass predicted profit through an exponential utility before optimizing to encode risk aversion.
- Increasing the risk-aversion parameter downweights high-profit, high-uncertainty tails and shifts recommended prices toward safer, lower values.