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Risk Preferences

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  • Stefan Felder
  • Thomas Mayrhofer

Abstract

Risk attitudes include risk aversion as well as higher-order risk preferences such as prudence and temperance. This article analyzes the effects of such preferences on medical test and treatment decisions, represented either by test and treatment thresholds or—when the test result is not given—by optimal cutoff values for diagnostic tests. For a risk-averse decision maker, effective treatment is a risk-reducing strategy since it prevents the low health outcome of forgoing treatment in the sick state. Compared with risk neutrality, risk aversion thus lowers both the test and the treatment threshold and decreases the optimal test cutoff value. Risk vulnerability, which combines risk aversion, prudence, and temperance, is relevant if there is a comorbidity risk: thresholds and optimal cutoff values decrease even more. Since common utility functions imply risk vulnerability, our findings suggest that diagnostics in low prevalence settings (e.g., screening) may be considered more beneficial when risk preferences are taken into account.

Suggested Citation

  • Stefan Felder & Thomas Mayrhofer, 2014. "Risk Preferences," Medical Decision Making, , vol. 34(1), pages 33-41, January.
    • Handle: RePEc:sae:medema:v:34:y:2014:i:1:p:33-41
    DOI: 10.1177/0272989X13493969
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    References listed on IDEAS

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    1. repec:zbw:rwirep:0321 is not listed on IDEAS
    2. Miriam Krieger & Thomas Mayrhofer, 2012. "Patient Preferences and Treatment Thresholds under Diagnostic Risk – An Economic Laboratory Experiment," Ruhr Economic Papers 0321, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    3. Louis Eeckhoudt & Harris Schlesinger, 2006. "Putting Risk in Its Proper Place," American Economic Review, American Economic Association, vol. 96(1), pages 280-289, March.
    4. Patrick L. Brockett & Linda L. Golden, 1987. "A Class of Utility Functions Containing all the Common Utility Functions," Management Science, INFORMS, vol. 33(8), pages 955-964, August.
    5. Krieger, Miriam & Mayrhofer, Thomas, 2012. "Patient Preferences and Treatment Thresholds under Diagnostic Risk – An Economic Laboratory Experiment," Ruhr Economic Papers 321, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    6. Bleichrodt, Han & Crainich, David & Eeckhoudt, Louis, 2003. "The effect of comorbidities on treatment decisions," Journal of Health Economics, Elsevier, vol. 22(5), pages 805-820, September.
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