Joint measurement of risk aversion, prudence, and temperance

S. Ebert, D. Wiesen

Research output: Contribution to journalArticleScientificpeer-review

Abstract

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.
Original languageEnglish
Pages (from-to)231-252
JournalJournal of Risk and Uncertainty
Volume48
Issue number3
DOIs
Publication statusPublished - Jun 2014

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Temperance
Risk aversion
Prudence
Experiment
Prospect theory
Risk preferences
Utility function
Economics
Correlates
Decision making
Risk-averse

Keywords

  • decision making under risk
  • experiment
  • prospect theory
  • prudence
  • risk aversion
  • risk-loving
  • temperance

Cite this

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Joint measurement of risk aversion, prudence, and temperance. / Ebert, S.; Wiesen, D.

In: Journal of Risk and Uncertainty, Vol. 48, No. 3, 06.2014, p. 231-252.

Research output: Contribution to journalArticleScientificpeer-review

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AB - 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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