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Higher Order Risk Attitudes, Demographics, and Financial Decisions

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  • Charles N. Noussair
  • Stefan T. Trautmann
  • Gijs van de Kuilen

Abstract

We study the prevalence of the higher order risk attitudes of prudence and temperance in an experiment with a large demographically representative sample of participants. Under expected utility, prudence and temperance are defined by a convex first, and concave second, derivative of the utility function, and have direct implications for saving behaviour and portfolio choice. In the experiment, participants make pairwise choices that distinguish prudent from imprudent, and temperate from intemperate, behaviour. We correlate individuals' risk aversion, prudence, and temperance levels to their demographic profiles and their financial decisions outside the experiment. We observe that the majority of individuals' decisions are consistent with risk aversion, prudence, and temperance. Prudence is positively correlated with saving, as predicted by precautionary saving theory. Temperance is negatively correlated with the riskiness of portfolio choices. Copyright 2014, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Review of Economic Studies.

Volume (Year): 81 (2014)
Issue (Month): 1 ()
Pages: 325-355

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Handle: RePEc:oup:restud:v:81:y:2014:i:1:p:325-355

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Citations

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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. Luigi Guiso & Paolo Sodini, 2012. "Household Finance. An Emerging Field," EIEF Working Papers Series 1204, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2012.
  3. Martin Kaae Jensen, 2012. "Distributional Comparative Statics," Discussion Papers 12-08, Department of Economics, University of Birmingham.
  4. 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.
  5. Kangoh Lee, 2012. "Uncertain indemnity and the demand for insurance," Theory and Decision, Springer, vol. 73(2), pages 249-265, August.
  6. Armantier, Olivier & Treich, Nicolas, 2010. "Eliciting Beliefs: Proper Scoring Rules, Incentives, Stakes and Hedging," TSE Working Papers 10-213, Toulouse School of Economics (TSE).
  7. Gola Carlo & Ilari Antonio, 2013. "Financial innovation oversight: a policy framework," Questioni di Economia e Finanza (Occasional Papers) 200, Bank of Italy, Economic Research and International Relations Area.
  8. Charles Noussair & Stefan Trautmann & Gijs Kuilen & Nathanael Vellekoop, 2013. "Risk aversion and religion," Journal of Risk and Uncertainty, Springer, vol. 47(2), pages 165-183, October.
  9. Vieider, Ferdinand M. & Chmura, Thorsten & Martinsson, Peter, 2012. "Risk attitudes, development, and growth: Macroeconomic evidence from experiments in 30 countries," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2012-401, Social Science Research Center Berlin (WZB).
  10. Christoph Heinzel, 2014. "Term structure of discount rates under multivariate s-ordered consumption growth," Working Papers SMART - LERECO 14-01, INRA UMR SMART.
  11. Vieider, Ferdinand M. & Lefebvre, Mathieu & Bouchouicha, Ranoua & Chmura, Thorsten & Hakimov, Rustamdjan & Krawczyk, Michal & Martinsson, Peter, 2013. "Common components of risk and uncertainty attitudes across contexts and domains: Evidence from 30 countries," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2013-402, Social Science Research Center Berlin (WZB).
  12. David Crainich & Louis Eeckhoudt & Alain Trannoy, 2011. "Even (mixed) risk lovers are prudent," Working Papers 2011-ECO-05, IESEG School of Management.
  13. Sebastian Ebert, 2013. "Moment characterization of higher-order risk preferences," Theory and Decision, Springer, vol. 74(2), pages 267-284, February.
  14. Vieider, Ferdinand M. & Truong, Nghi & Martinsson, Peter & Pham Khanh Nam & Martinsson, Peter, 2013. "Risk preferences and development revisited: A field experiment in Vietnam," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2013-403, Social Science Research Center Berlin (WZB).
  15. 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.
  16. 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.
  17. Cary Deck & Harris Schlesinger, 2012. "Consistency of Higher Order Risk Preferences," CESifo Working Paper Series 4047, CESifo Group Munich.

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