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Exploring Higher-Order Risk Effects

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  • Cary Deck
  • Harris Schlesinger

Abstract

Higher-order risk effects play an important role in examining economic behavior under uncertainty. A precautionary demand for saving has been linked to the property of prudence and the property of temperance has been used to show how the presence of an unavoidable risk affects one’s behavior towards a second risk. These two properties also play key roles in aversion to negative skewness and to kurtosis, respectively. Both properties recently have been characterized by preferences over lottery pairs in simple 50-50 gambles. The simplicity of this characterization is ideal for experimental investigation. This paper reports the results of such experiments and concludes that there is behavioral evidence for prudence, but not for temperance. Implications of these results for both expected-utility and non-expected-utility models are examined.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2487.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2487

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Keywords: risk; prudence; temperance; laboratory experiments;

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References

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  1. Christopher D. Carroll, 1992. "How does future income affect current consumption?," Working Paper Series / Economic Activity Section 126, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. SCHROYEN, Fred, 2011. "Attitudes towards income risk in the presence of quantity constraints," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2011020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. 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.
  3. Gollier, Christian & Hammitt, James & Treich, Nicolas, 2013. "Risk and Choice: A Research Saga," IDEI Working Papers 804, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Stefan Felder & Thomas Mayrhofer, 2011. "Higher-Order Risk Preferences – Consequences for Test and Treatment Thresholds and Optimal Cutoffs," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0287, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  5. Charles N. Noussair & Stefan T. Trautmann & Gijs van de Kuilen, 2014. "Higher Order Risk Attitudes, Demographics, and Financial Decisions," Review of Economic Studies, Oxford University Press, vol. 81(1), pages 325-355.
  6. Christoph Heinzel, 2014. "Term structure of discount rates under multivariate s-ordered consumption growth," Working Papers SMART - LERECO 14-01, INRA UMR SMART.
  7. Patrick Roger, 2011. "Mixed risk aversion and preference for risk disaggregation: a story of moments," Theory and Decision, Springer, vol. 70(1), pages 27-44, January.
  8. Georges Dionne & Jingyuan Li & Cedric Okou, 2012. "An Extension of the Consumption-based CAPM Model," Cahiers de recherche 1214, CIRPEE.
  9. David Crainich & Louis Eeckhoudt & Alain Trannoy, 2013. "Even (Mixed) Risk Lovers Are Prudent," American Economic Review, American Economic Association, vol. 103(4), pages 1529-35, June.
  10. 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.
  11. Cary Deck & Harris Schlesinger, 2012. "Consistency of Higher Order Risk Preferences," CESifo Working Paper Series 4047, CESifo Group Munich.
  12. Peter Brooks & Simon Peters & Horst Zank, 2014. "Risk behavior for gain, loss, and mixed prospects," Theory and Decision, Springer, vol. 77(2), pages 153-182, August.
  13. Sebastian Ebert, 2013. "Moment characterization of higher-order risk preferences," Theory and Decision, Springer, vol. 74(2), pages 267-284, February.
  14. Philip J. Grossman & Catherine C. Eckel, 2012. "Loving the Long Shot: Risk Taking with Skewed Lotteries," Monash Economics Working Papers 41-12, Monash University, Department of Economics.
  15. Kangoh Lee, 2012. "Uncertain indemnity and the demand for insurance," Theory and Decision, Springer, vol. 73(2), pages 249-265, August.
  16. 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.
  17. Jingyuan Li, 2012. "Precautionary saving in the presence of labor income and interest rate risks," Journal of Economics, Springer, vol. 106(3), pages 251-266, July.
  18. Sebastian Ebert & Daniel Wiesen, 2009. "An experimental methodology testing for prudence and third-order preferences," Bonn Econ Discussion Papers, University of Bonn, Germany bgse21_2009, University of Bonn, Germany.

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