The reflection effect for higher order risk preferences

Han Bleichrodt; Paul van Bruggen

doi:10.1162/rest_a_00980

The reflection effect for higher order risk preferences

Research output: Contribution to journal › Article › Scientific › peer-review

Abstract

Higher order risk preferences are important determinants of economic behaviour. We apply insights from behavioural economics: we measure higher order risk preferences for pure gains and losses. We find a reflection effect not only for second order risk preferences, like Kahneman and Tversky (1979), but also for higher order risk preferences: we find risk aversion, prudence and intemperance for gains, and much more risk loving preferences, imprudence and temperance for losses. These findings are at odds with a universal preference for combining good with bad or good with good, which previous results suggest may underlie higher order risk preferences.

Original language	English
Journal	The Review of Economics and Statistics
DOIs	https://doi.org/10.1162/rest_a_00980
Publication status	E-pub ahead of print - Oct 2020

Keywords

risk apportionment
higher order risk preferences
risk aversion
prudence
temperance
reference dependence

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10.1162/rest_a_00980

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abstract = "Higher order risk preferences are important determinants of economic behaviour. We apply insights from behavioural economics: we measure higher order risk preferences for pure gains and losses. We find a reflection effect not only for second order risk preferences, like Kahneman and Tversky (1979), but also for higher order risk preferences: we find risk aversion, prudence and intemperance for gains, and much more risk loving preferences, imprudence and temperance for losses. These findings are at odds with a universal preference for combining good with bad or good with good, which previous results suggest may underlie higher order risk preferences.",

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AB - Higher order risk preferences are important determinants of economic behaviour. We apply insights from behavioural economics: we measure higher order risk preferences for pure gains and losses. We find a reflection effect not only for second order risk preferences, like Kahneman and Tversky (1979), but also for higher order risk preferences: we find risk aversion, prudence and intemperance for gains, and much more risk loving preferences, imprudence and temperance for losses. These findings are at odds with a universal preference for combining good with bad or good with good, which previous results suggest may underlie higher order risk preferences.

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