Higher-Order Risk Preferences – Consequences for Test and Treatment Thresholds and Optimal Cutoffs
AbstractHigher-order risk attitudes include risk aversion, prudence, and temperance. This paper analyzes the effects of such preferences on medical test and treatment decisions, represented either by test and treatment thresholds or – if the test characteristics are endogenous – by the optimal cutoff value for testing. For a risk-averse decision maker, treatment is a risk reducing strategy since it prevents the low health outcome that forgoing treatment yields in the sick state. As compared to risk neutrality, risk aversion thus reduces both the test and the treatment threshold and decreases the optimal cutoff. Prudence is relevant if a comorbidity risk applies in the sick state. It leads to even lower thresholds and a lower optimal cutoff. Finally, temperance plays a role if the comorbidity risk is left-skewed. It lowers the thresholds and the optimal cutoff even further. These findings suggest that diagnostics in low prevalence settings (e.g. screening) are considered more beneficial when higher-order risk preferences are taken into account.
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Bibliographic InfoPaper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0287.
Length: 21 pages
Date of creation: Oct 2011
Date of revision:
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- I10 - Health, Education, and Welfare - - Health - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-19 (All new papers)
- NEP-CBE-2011-12-19 (Cognitive & Behavioural Economics)
- NEP-UPT-2011-12-19 (Utility Models & Prospect Theory)
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