Prudence with Respect to Ambiguity

25 Pages Posted: 6 Sep 2017

See all articles by Aurelien Baillon

Aurelien Baillon

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: September 2017

Abstract

Under expected utility, prudence is equivalent to a positive third derivative of utility and plays a crucial role in precautionary saving behaviour. Eeckhoudt and Schlesinger (2006) proposed behavioural definitions of prudence and of higher order risk preferences. The present article proposes a similar definition for prudence with respect to ambiguity, i.e. situations in which objective probabilities are not available. Implications for several ambiguity models are derived. Ambiguity prudence is implied by Hansen and Sargent's (2001) multiplier preferences, empirically correlates with financial behaviour and plays a key role in prevention behaviour.

Suggested Citation

Baillon, Aurelien, Prudence with Respect to Ambiguity (September 2017). The Economic Journal, Vol. 127, Issue 604, pp. 1731-1755, 2017. Available at SSRN: https://ssrn.com/abstract=3031006 or http://dx.doi.org/10.1111/ecoj.12358

Aurelien Baillon (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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