Joint measurement of risk aversion, prudence, and temperance
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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.
KeywordsDecision making under risk Experiment Prospect theory Prudence Risk aversion Risk-loving Temperance
JEL ClassificationsC91 D81
We are grateful for valuable comments and suggestions by Han Bleichrodt, Louis Eeckhoudt, Armin Falk, Thomas Gehrig, Holger Gerhardt, Glenn Harrison, Lorens Imhof, Harris Schlesinger, Reinhard Selten, anonymous referees, and the editor. We also thank conference participants of the 2012 ESEM (Malaga), 2011 ESA European Meeting (Luxembourg), the 2011 EEA (Oslo), the 2010 GfeW Meeting (Luxembourg), and the 2010 LMU Excellence Symposium in Munich. We further thank seminar participants in Bonn, Essen, Freiburg, Rotterdam, Tilburg, and participants of the Sino-German Summer School workshop in Bonn in January 2010. We thank Emanuel Castillo for his z-Tree programming assistance as well as Martin Acht and Javier Sanchez for their help with conducting the experiment. Christian Hilpert and Johannes Pfeifer provided very valuable consultation on Matlab programming. Furthermore, we thank Michael Borss, Mara Ewers, Stefanie Lehmann, Jan Meise, and Gert Pönitzsch for their participation in a pilot experiment and their helpful comments on the experiment at that stage. The experiment was financed through the Geneva Association Research Grant 2009. During their doctoral studies, Ebert received financial support from the Bonn Graduate School of Economics, and Wiesen from the Konrad-Adenauer-Stiftung e.V.
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