Journal of Risk and Uncertainty

, Volume 48, Issue 3, pp 231–252 | Cite as

Joint measurement of risk aversion, prudence, and temperance

Article

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.

Keywords

Decision making under risk Experiment Prospect theory Prudence Risk aversion Risk-loving Temperance 

JEL Classifications

C91 D81 

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Department of FinanceTilburg UniversityTilburgThe Netherlands
  2. 2.Seminar of Personnel Economics and HRM, Faculty of Management, Economics, and Social SciencesUniversity of CologneCologneGermany

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