Higher Order Risk Attitudes, Demographics, and Financial Decisions

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Abstract

We conduct an experiment to study the prevalence of the higher order risk attitudes of prudence and temperance, in a large demographically representative sample, as well as in a sample of undergraduate students. Participants make pairwise choices between lotteries of the form proposed by Eeckhoudt and Schlesinger (2006). The choices in these lotteries isolate prudent from imprudent, and temperate from intemperate, behavior. We relate individuals’ risk aversion, prudence, and temperance levels to demographics and financial decisions. We observe that the majority of individuals’ decisions are consistent with risk aversion, prudence, and temperance, in both the student and the demographically representative sample. An individual’s level of prudence is predictive of his wealth, saving, and borrowing behavior outside of the experiment, while temperance predicts the riskiness of portfolio choices. Our findings suggest that the coefficient of relative prudence for a representative individual is approximately equal to two.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Volume2011-055
Publication statusPublished - 2011

Publication series

NameCentER Discussion Paper
Volume2011-055

Fingerprint

Risk attitude
Demographics
Financial decisions
Prudence
Temperance
Lottery
Experiment
Risk aversion
Coefficients
Wealth
Borrowing
Individual risk
Riskiness
Portfolio choice
Undergraduate students

Keywords

  • prudence
  • temperance
  • saving
  • portfolio choice
  • experiment

Cite this

Noussair, C. N., Trautmann, S. T., & van de Kuilen, G. (2011). Higher Order Risk Attitudes, Demographics, and Financial Decisions. (CentER Discussion Paper; Vol. 2011-055). Tilburg: Economics.
Noussair, C.N. ; Trautmann, S.T. ; van de Kuilen, G. / Higher Order Risk Attitudes, Demographics, and Financial Decisions. Tilburg : Economics, 2011. (CentER Discussion Paper).
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Noussair, CN, Trautmann, ST & van de Kuilen, G 2011 'Higher Order Risk Attitudes, Demographics, and Financial Decisions' CentER Discussion Paper, vol. 2011-055, Economics, Tilburg.

Higher Order Risk Attitudes, Demographics, and Financial Decisions. / Noussair, C.N.; Trautmann, S.T.; van de Kuilen, G.

Tilburg : Economics, 2011. (CentER Discussion Paper; Vol. 2011-055).

Research output: Working paperDiscussion paperOther research output

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AB - We conduct an experiment to study the prevalence of the higher order risk attitudes of prudence and temperance, in a large demographically representative sample, as well as in a sample of undergraduate students. Participants make pairwise choices between lotteries of the form proposed by Eeckhoudt and Schlesinger (2006). The choices in these lotteries isolate prudent from imprudent, and temperate from intemperate, behavior. We relate individuals’ risk aversion, prudence, and temperance levels to demographics and financial decisions. We observe that the majority of individuals’ decisions are consistent with risk aversion, prudence, and temperance, in both the student and the demographically representative sample. An individual’s level of prudence is predictive of his wealth, saving, and borrowing behavior outside of the experiment, while temperance predicts the riskiness of portfolio choices. Our findings suggest that the coefficient of relative prudence for a representative individual is approximately equal to two.

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Noussair CN, Trautmann ST, van de Kuilen G. Higher Order Risk Attitudes, Demographics, and Financial Decisions. Tilburg: Economics. 2011. (CentER Discussion Paper).