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Higher order risk attitudes and prevention under different timings of loss

Takehito Masuda and Eungik Lee
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Eungik Lee: Seoul National University

Experimental Economics, 2019, vol. 22, issue 1, No 9, 197-215

Abstract: Abstract This paper provides experimental evidence of the role of higher order risk attitudes—especially prudence—in prevention behavior. Prudence, under an expected utility framework, increases (decreases) self-protection effort compared to the risk neutral level when the risk of losing part of an income exists in a future (the same) period. Motivated by these predictions that give the exact test on prudence, an experiment was designed where subjects go through higher order risk attitude elicitation and make a self-protection decision. In contrast to the expected utility theory, the observed efforts are less than the risk neutral level, regardless of the timing of loss. This violation of expected utility predictions can be explained by probability weighting.

Keywords: Higher order risk attitudes; Prudence; Prevention; Timing of loss; Probability weighting (search for similar items in EconPapers)
JEL-codes: C91 C92 D81 E21 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10683-018-9588-x

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