Higher Order Risk Attitudes, Demographics, and Financial Decisions

CentER Working Paper Series No. 2011-055

43 Pages Posted: 23 May 2011

Multiple version iconThere are 2 versions of this paper

Date Written: April 18, 2011

Abstract

We conduct an experiment to study the prevalence of the higher order risk attitudes of prudence and temperance, in a large demographically representative sample, as well as in a sample of undergraduate students. Participants make pairwise choices between lotteries of the form proposed by Eeckhoudt and Schlesinger (2006). The choices in these lotteries isolate prudent from imprudent, and temperate from intemperate, behavior. We relate individuals’ risk aversion, prudence, and temperance levels to demographics and financial decisions. We observe that the majority of individuals’ decisions are consistent with risk aversion, prudence, and temperance, in both the student and the demographically representative sample. An individual’s level of prudence is predictive of his wealth, saving, and borrowing behavior outside of the experiment, while temperance predicts the riskiness of portfolio choices. Our findings suggest that the coefficient of relative prudence for a representative individual is approximately equal to two.

Keywords: prudence, temperance, saving, portfolio choice, experiment

JEL Classification: C91, C93, D14, D81, E21

Suggested Citation

Noussair, Charles N. and Trautmann, Stefan and van de Kuilen, Gijs, Higher Order Risk Attitudes, Demographics, and Financial Decisions (April 18, 2011). CentER Working Paper Series No. 2011-055. Available at SSRN: https://ssrn.com/abstract=1843094 or http://dx.doi.org/10.2139/ssrn.1843094

Charles N. Noussair (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Stefan Trautmann

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Gijs Van de Kuilen

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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