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Higher-Order Risk Preferences – Consequences for Test and Treatment Thresholds and Optimal Cutoffs

  • Stefan Felder
  • Thomas Mayrhofer

    ()

Higher-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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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0287.

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Length: 21 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:rwi:repape:0287
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  1. Noussair, C.N. & Trautmann, S.T. & van de Kuilen, G., 2011. "Higher Order Risk Attitudes, Demographics, and Financial Decisions," Discussion Paper 2011-055, Tilburg University, Center for Economic Research.
  2. Caballe, Jordi & Pomansky, Alexey, 1996. "Mixed Risk Aversion," Journal of Economic Theory, Elsevier, vol. 71(2), pages 485-513, November.
  3. Cary Deck & Harris Schlesinger, 2010. "Exploring Higher Order Risk Effects," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1403-1420.
  4. Louis Eeckhoudt & Harris Schlesinger, 2005. "Putting Risk in its Proper Place," CESifo Working Paper Series 1462, CESifo Group Munich.
  5. John A. List, 2003. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," NBER Working Papers 9736, National Bureau of Economic Research, Inc.
  6. Sebastian Ebert & Daniel Wiesen, 2011. "Testing for Prudence and Skewness Seeking," Management Science, INFORMS, vol. 57(7), pages 1334-1349, July.
  7. Han Bleichrodt & Jose Luis Pinto, 2000. "A Parameter-Free Elicitation of the Probability Weighting Function in Medical Decision Analysis," Management Science, INFORMS, vol. 46(11), pages 1485-1496, November.
  8. Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
  9. L. Eeckhoudt & H. Schlesinger, 2006. "Putting risk in its proper place," Post-Print hal-00283170, HAL.
  10. Eeckhoudt, Louis & Gollier, Christian & Schlesinger, Harris, 1996. "Changes in Background Risk and Risk-Taking Behavior," Econometrica, Econometric Society, vol. 64(3), pages 683-89, May.
  11. 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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