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Putting risk in its proper place

Listed author(s):
  • L. Eeckhoudt

    (LEM - Lille - Economie et Management - Université de Lille, Sciences et Technologies - Fédération Universitaire et Polytechnique de Lille - Université de Lille, Sciences Humaines et Sociales - CNRS - Centre National de la Recherche Scientifique)

  • H. 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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Paper provided by HAL in its series Post-Print with number hal-00283170.

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Length:
Date of creation: 2006
Publication status: Published in American Economic Review, American Economic Association, 2006, 96 (1), pp.280-289
Handle: RePEc:hal:journl:hal-00283170
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00283170
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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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.
  2. Anthony F. Shorrocks & James E. Foster, 1987. "Transfer Sensitive Inequality Measures," Review of Economic Studies, Oxford University Press, vol. 54(3), pages 485-497.
  3. Eeckhoudt, Louis & Gollier, Christian & Schneider, Thierry, 1995. "Risk-aversion, prudence and temperance: A unified approach," Economics Letters, Elsevier, vol. 48(3-4), pages 331-336, June.
  4. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  5. Menezes, Carmen F. & Wang, X.Henry, 2005. "Increasing outer risk," Journal of Mathematical Economics, Elsevier, vol. 41(7), pages 875-886, November.
  6. Bigelow, John P & Menezes, Carmen F, 1995. "Outside Risk Aversion and the Comparative Statics of Increasing Risk in Quasi-linear Decision Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 643-673, August.
  7. Ekern, Steinar, 1980. "Increasing Nth degree risk," Economics Letters, Elsevier, vol. 6(4), pages 329-333.
  8. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279-279.
  9. Nachman, David C., 1982. "Preservation of "more risk averse" under expectations," Journal of Economic Theory, Elsevier, vol. 28(2), pages 361-368, December.
  10. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-154, January.
  11. Caballe, Jordi & Pomansky, Alexey, 1996. "Mixed Risk Aversion," Journal of Economic Theory, Elsevier, vol. 71(2), pages 485-513, November.
  12. 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.
  13. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
  14. Menezes, C & Geiss, C & Tressler, J, 1980. "Increasing Downside Risk," American Economic Review, American Economic Association, vol. 70(5), pages 921-932, December.
  15. Segal, Uzi & Spivak, Avia, 1990. "First order versus second order risk aversion," Journal of Economic Theory, Elsevier, vol. 51(1), pages 111-125, June.
  16. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 82(3), pages 465-473.
  17. Miles S. Kimball, 1991. "Precautionary Motives for Holding Assets," NBER Working Papers 3586, National Bureau of Economic Research, Inc.
  18. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
  19. Gollier, Christian & Pratt, John W, 1996. "Risk Vulnerability and the Tempering Effect of Background Risk," Econometrica, Econometric Society, vol. 64(5), pages 1109-1123, September.
  20. repec:hhs:iuiwop:444 is not listed on IDEAS
  21. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, January.
  22. Lajeri-Chaherli, Fatma, 2004. "Proper prudence, standard prudence and precautionary vulnerability," Economics Letters, Elsevier, vol. 82(1), pages 29-34, January.
  23. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
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