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Testing for Prudence and Skewness Seeking

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Author Info

  • Sebastian Ebert

    ()
    (Bonn Graduate School of Economics, University of Bonn, D-53113 Bonn, Germany)

  • Daniel Wiesen

    ()
    (Laboratory for Experimental Economics, University of Bonn, D-53113 Bonn, Germany)

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    Abstract

    Numerous theoretical predictions such as precautionary saving or preventive behavior have been derived for prudent decision makers. Further, prudence can be characterized as downside risk aversion and plays a key role in preference for skewness. We use a simple experimental method to test for prudence and skewness preference in the laboratory and compare the two. To this end, we introduce a novel graphical representation of compound lotteries that is easily accessible to subjects and test it for robustness, using a factorial design. Prudence is observed on the aggregate and individual level. We find that prudence does not boil down to skewness seeking. We further provide some theoretical explanations for this result. This paper was accepted by Peter Wakker, decision analysis.

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    File URL: http://dx.doi.org/10.1287/mnsc.1110.1354
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 57 (2011)
    Issue (Month): 7 (July)
    Pages: 1334-1349

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    Handle: RePEc:inm:ormnsc:v:57:y:2011:i:7:p:1334-1349

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    Related research

    Keywords: decision making under risk; precautionary savings; prudence; downside risk; skewness seeking; laboratory experiment;

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    Cited by:
    1. Miriam Krieger & Thomas Mayrhofer, 2012. "Patient Preferences and Treatment Thresholds under Diagnostic Risk – An Economic Laboratory Experiment," Ruhr Economic Papers 0321, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    2. Mayrhofer, Thomas & Krieger, Miriam, 2012. "Patient Preferences and Treatment Thresholds under Diagnostic Risk: An Economic Laboratory Experiment," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62033, Verein für Socialpolitik / German Economic Association.
    3. Christoph Heinzel, 2014. "Term structure of discount rates under multivariate s-ordered consumption growth," Working Papers SMART - LERECO 14-01, INRA UMR SMART.
    4. Stefan Felder & Thomas Mayrhofer, 2011. "Higher-Order Risk Preferences – Consequences for Test and Treatment Thresholds and Optimal Cutoffs," Ruhr Economic Papers 0287, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    5. Kocher, Martin & Pahlke, Julius & Trautmann, Stefan, 2013. "An Experimental Study of Precautionary Bidding," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79690, Verein für Socialpolitik / German Economic Association.
    6. Patrick Roger & Marie-Hélène Broihanne & Maxime Merli, 2012. "In search of positive skewness: the case of individual investors," Working Papers of LaRGE Research Center 2012-04, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg (France).
    7. Cary Deck & Harris Schlesinger, 2012. "Consistency of Higher Order Risk Preferences," CESifo Working Paper Series 4047, CESifo Group Munich.
    8. Sebastian Ebert, 2013. "Moment characterization of higher-order risk preferences," Theory and Decision, Springer, vol. 74(2), pages 267-284, February.

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