Higher order risk attitudes and prevention under different timings of loss
This paper provides experimental evidence of the role of higher order risk attitudes—especially prudence—in prevention behavior. Prudence, under an expected utility framework, increases (decreases) self-protection effort compared to the risk neutral level when the risk of losing part of an income exists in a future (the same) period. Motivated by these predictions that give the exact test on prudence, an experiment was designed where subjects go through higher order risk attitude elicitation and make a self-protection decision. In contrast to the expected utility theory, the observed efforts are less than the risk neutral level, regardless of the timing of loss. This violation of expected utility predictions can be explained by probability weighting.
KeywordsHigher order risk attitudes Prudence Prevention Timing of loss Probability weighting
JEL ClassificationC91 C92 D81 E21
We sincerely thank Charles Noussair for his continuous encouragement and helpful suggestions, which improved our paper significantly. We thank Soo Hong Chew, Syngjoo Choi, Nobuyuki Hanaki, Stefan Trautmann, Songfa Zhong, the participants of 2017 ESA North American Meeting, the University of Arizona experimental reading group, and the SURE workshop at Seoul National University. Sebastian Ebert kindly shared with us their z-Tree programs. Masuda completed most of this study during his visit to the Economic Science Laboratory at the University of Arizona. We gratefully acknowledge the financial support received from JSPS KAKENHI Grant Number 17K13701, 15H05728, the Keihanshin Consortium for Fostering the Next Generation of Global Leaders in Research (K-CONNEX), the John-Mung Overseas Program, and the Murata Science Foundation. Lee acknowledges funding from the BK21Plus Program of the Ministry of Education and National Research Foundation of Korea (NRF-21B20130000013).
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