Higher order risk preferences and economic decisions

Yilong Xu, Maarten Boksem, Charles N. Noussair, Stefan T. Trautmann, Gijs van de Kuilen and Alan Sanfey

No 2025-04, Experimental Economics Center Working Paper Series from Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University

Abstract: In theory, individuals\' higher order risk attitudes of prudence and temperance influence saving and investment decisions. Prudent individuals save more when their future income becomes more uncertain, and temperate individuals prefer less risky investments in the presence of greater background risks. In a controlled experiment, we measure individuals' higher order risk attitudes directly, using two different elicitation methods. Participants then make saving and investment decisions under varying levels of background risk. We find strong effects of background risk on saving and investment. Moreover, individual prudence measures correlate with the strength of precautionary saving, while individual temperance measures do not do so with investment. The risk attitudes acquired with the two elicitation methods are strongly correlated with each other. The representative individual is risk averse and prudent, and neutral towards temperance.

Keywords: high-order risks; precautionary saving; portfolio choice; risky decision-making (search for similar items in EconPapers)
JEL-codes: C91 D15 D81 E21 E22 G51 (search for similar items in EconPapers)
Pages: 43
Date: 2025-10
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Persistent link: https://EconPapers.repec.org/RePEc:exc:wpaper:2025-04

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