An experimental methodology testing for prudence and third-order preferences
AbstractWe propose an experimental method to test individuals for prudence (i.e. downside risk aversion) outside the expected utility framework. Our method relies on a novel representation of compound lotteries which allows for a systematic parameterization that captures the full generality of prudence. Therefore, we develop a general technique for lottery calibration in experiments. Since we investigate a very subtle third-order property we test our method in the laboratory employing a factorial design. We find that it yields robust results and that prudence is observed on the aggregate as well as on the individual level. Further we show that preferences based on statistical moments, in particular skewness seeking, can at most approximately explain individuals' behavior in the experiment.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse21_2009.
Date of creation: Sep 2009
Date of revision:
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Decision making under uncertainty; risk preferences; prudence; downside risk; statistical moments; laboratory experiment;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-09-19 (All new papers)
- NEP-CBE-2009-09-19 (Cognitive & Behavioural Economics)
- NEP-EXP-2009-09-19 (Experimental Economics)
- NEP-UPT-2009-09-19 (Utility Models & Prospect Theory)
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