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Putting Risk in Its Proper Place

  • Louis Eeckhoudt
  • Harris Schlesinger

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.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 96 (2006)
Issue (Month): 1 (March)
Pages: 280-289

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Handle: RePEc:aea:aecrev:v:96:y:2006:i:1:p:280-289
Note: DOI: 10.1257/000282806776157777
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