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Putting Risk in Its Proper Place

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  • Louis Eeckhoudt
  • Harris Schlesinger

Abstract

This paper examines preferences toward particular classes of lottery pairs. We show how such concepts as prudence and temperance can be fully characterized by a preference relation over these lotteries. If preferences are defined in an expected-utility framework with differentiable utility, the direction of preference for a particular class of lottery pairs is equivalent to signing the nth derivative of the utility function. What makes our characterization appealing is its simplicity, which seems particularly amenable to experimentation.

Suggested Citation

  • Louis Eeckhoudt & Harris Schlesinger, 2006. "Putting Risk in Its Proper Place," American Economic Review, American Economic Association, vol. 96(1), pages 280-289, March.
    • Handle: RePEc:aea:aecrev:v:96:y:2006:i:1:p:280-289
    Note: DOI: 10.1257/000282806776157777
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    References listed on IDEAS

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    1. Eeckhoudt, Louis & Gollier, Christian & Schlesinger, Harris, 1996. "Changes in Background Risk and Risk-Taking Behavior," Econometrica, Econometric Society, vol. 64(3), pages 683-689, May.
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