Exploring Higher-Order Risk Effects

By Cary Deck, Harris Schlesinger. Social Science Research Network, 2010

229 citations recorded by the source corpus.

Higher-order risk effects play an important role in examining economic behavior under uncertainty. A precautionary demand for saving has been linked to the property of prudence and the property of temperance has been used to show how the presence of an unavoidable risk affects one’s behavior towards a second risk. These two properties also play key roles in aversion to negative skewness and to kurtosis, respectively. Both properties recently have been characterized by preferences over lottery pairs in simple 50-50 gambles. The simplicity of this characterization is ideal for experimental investigation. This paper reports the results of such experiments and concludes that there is behavioral evidence for prudence, but not for temperance. Implications of these results for both expected-utility and non-expected-utility models are examined.

Subfields: Economics and Econometrics, General Decision Sciences

View Paper: https://www.semanticscholar.org/paper/78f3b5dbb3680e36c1a4158fabc6db21ae0e70c9

Citations in the corpus

• Consistency of Higher Order Risk Preferences (2012, unknown): “If we use the expected final payoff as our reference point for 3 and 4 order risk preferences, the value function and the probability weighting work in opposite directions, as first pointed out by Deck and Schlesinger (2010). 30”
• The Relationship between Relative Risk Aversion and the Level of Education: A Survey and Implications for the Demand for Life Insurance (2015, unknown): “There are even fewer studies on higher order risk attitudes like temperance (Deck and Schlesinger, 2010).”