Exploring Higher-Order Risk Effects
AbstractHigher-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 InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2487.
Date of creation: 2008
Date of revision:
risk; prudence; temperance; laboratory experiments;
Other versions of this item:
- C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
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