A long and storied tradition explains the common human aversion to risk as the choice between a certain opportunity and a risky one. Before an investor embarks on the tortuous road to understanding risk in real estate he must have an understanding of classic risk.

The graphic above sheds light on how the price of a risky opportunity is reached. In essence, the buyer requires a discount to consider the possibility the investment will not turn out as expected. This discount is at the foundation of a variety of market pricing mechanisms. The degree of curvature of the function tells us how risk averse an investor is and how much discount he will require in order to undertake risk.