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Exploring Higher-Order Risk Effects

29 Pages Posted: 8 Dec 2008  

Cary A. Deck

University of Arkansas - Department of Economics

Harris Schlesinger

University of Alabama; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: December 2008

Abstract

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.

Keywords: risk, prudence, temperance, laboratory experiments

JEL Classification: C9, D8

Suggested Citation

Deck, Cary A. and Schlesinger, Harris, Exploring Higher-Order Risk Effects (December 2008). CESifo Working Paper Series No. 2487. Available at SSRN: https://ssrn.com/abstract=1313032

Cary A. Deck

University of Arkansas - Department of Economics ( email )

Fayetteville, AR 72701
United States
479-575-6226 (Phone)
479-575-3241 (Fax)

Harris Schlesinger (Contact Author)

University of Alabama ( email )

P.O. Box 870244
200 Alston Hall, Box 870224
Tuscaloosa, AL 35487
United States
205-348-7858 (Phone)
205-348-0590 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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