Higher order risk attitudes, demographics, and financial decisions

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97 Citations (Scopus)

Abstract

We study the prevalence of the higher order risk attitudes of prudence and temperance in an experiment with a large demographically representative sample of participants. Under expected utility, prudence and temperance are defined by a convex first, and concave second, derivative of the utility function, and have direct implications for saving behaviour and portfolio choice. In the experiment, participants make pairwise choices that distinguish prudent from imprudent, and temperate from intemperate, behaviour. We correlate individuals' risk aversion, prudence, and temperance levels to their demographic profiles and their financial decisions outside the experiment. We observe that the majority of individuals' decisions are consistent with risk aversion, prudence, and temperance. Prudence is positively correlated with saving, as predicted by precautionary saving theory. Temperance is negatively correlated with the riskiness of portfolio choices.
Original languageEnglish
Pages (from-to)325-355
JournalReview of Economic Studies
Volume81
Issue number1
Early online date17 Sep 2013
DOIs
Publication statusPublished - Jan 2014

Keywords

  • Prudence
  • Temperance
  • Experiment

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