Exploring Higher Order Risk Effects

Cary Deck () and Harris Schlesinger

The Review of Economic Studies, 2010, vol. 77, issue 4, 1403-1420

Abstract: Precautionary saving has been linked to the property of prudence, and the property of temperance has been used to show how the presence of an unavoidable risk affects one's behaviour towards a second risk. These two higher order risk effects also play key roles in aversion to negative skewness and to kurtosis, respectively. This article presents a laboratory experiment to determine whether subjects are prudent and/or temperate. The experiment is based upon preferences over lottery pairs in simple 50-50 gambles. Subjects are asked in which of two states of nature they would prefer to receive a zero-mean gamble. For prudence, the choices are between a lower and higher wealth outcome. For temperance, the choices are between a state with no other risk and a state with a second (independent) risk. The results show behavioural evidence for prudence, but they also show evidence of intemperate behaviour. Implications of these results for both expected-utility and non-expected-utility models are examined. Copyright , Wiley-Blackwell.

Date: 2010
References: Add references at CitEc
Citations: View citations in EconPapers (121)

Downloads: (external link)
http://hdl.handle.net/10.1111/j.1467-937X.2010.00605.x (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Exploring Higher-Order Risk Effects (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:77:y:2010:i:4:p:1403-1420

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().