On the Robustness of Higher Order Risk Preferences

21 Pages Posted: 5 Jun 2018

See all articles by Cary A. Deck

Cary A. Deck

University of Alabama - Department of Economics, Finance and Legal Studies

Harris Schlesinger

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

Date Written: June 2018

Abstract

Economists have begun to recognize the role that higher order risk preferences play in a variety of settings. As such, several experiments have documented the degree of prudence, temperance, and, to a lesser extent, edginess and bentness that laboratory subjects exhibit. More recently, researchers have argued that higher order risk preferences generally conform to mixed risk‐averse and mixed risk‐loving patterns that arise from a preference for disaggregating or aggregating harms, respectively. This article examines the robustness of this pattern in three ways. First, it attempts to directly replicate previous results with compound lotteries over monetary outcomes. Second, it compares behavior in compound lotteries with behavior in reduced‐form lotteries. And third, it evaluates choices over monetary and nonmonetary risks. While previous results are replicated for compound lotteries over monetary outcomes and aggregate behavior with reduced‐form lotteries has a similar pattern, individuals clearly treat compound and reduced‐form lotteries differently. Further, behavior differs between monetary and nonmonetary outcomes.

Suggested Citation

Deck, Cary A. and Schlesinger, Harris, On the Robustness of Higher Order Risk Preferences (June 2018). Journal of Risk and Insurance, Vol. 85, Issue 2, pp. 313-333, 2018, Available at SSRN: https://ssrn.com/abstract=3189174 or http://dx.doi.org/10.1111/jori.12217

Cary A. Deck (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

Harris Schlesinger

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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