Joint measurement of risk aversion, prudence, and temperance

Risk aversion—but also the higher-order risk preferences of prudence and temperance—are fundamental concepts in the study of economic decision making. We propose a method to jointly measure the intensity of risk aversion, prudence, and temperance. Our theoretical approach is to define risk compensat...

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Bibliographic Details
Published inJournal of risk and uncertainty Vol. 48; no. 3; pp. 231 - 252
Main Authors Ebert, Sebastian, Wiesen, Daniel
Format Journal Article
LanguageEnglish
Published Boston Springer Science+Business Media 01.06.2014
Springer US
Springer Nature B.V
Subjects
Decision making
Economic models
Economic statistics
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Environmental Economics
Expected utility
Experimentation
Experiments
Factorial design
Financial risk
Investment risk
Kurtosis
Lotteries
Microeconomics
Operations Research/Decision Theory
Preferences
Price lists
Prospect theory
Risk aversion
Risk aversion preference
Risk management
Risk preferences
Risk theory
Skewness
Studies
Utility functions
Prudence
Risk aversion
Temperance
Prospect theory
Decision making under risk
Experiment
C91
D81
Risk-loving
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Summary:Risk aversion—but also the higher-order risk preferences of prudence and temperance—are fundamental concepts in the study of economic decision making. We propose a method to jointly measure the intensity of risk aversion, prudence, and temperance. Our theoretical approach is to define risk compensations of different orders, and in an experiment we elicit these compensations with a price list technique. We find evidence for risk aversion, prudence, and temperance. These traits correlate within subjects. The compensations elicited for prudence are significantly larger than those for risk aversion and temperance. In contrast to commonly used utility functions, prospect theory can predict this behavioral pattern. In our experiment, risk-averse, risk-loving, and risk-neutral subjects are prudent. This supports a recent theoretical observation that prudence may be a more universal trait than previously realized.
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ISSN:0895-5646
1573-0476
DOI:10.1007/s11166-014-9193-0