On the Robustness of Higher Order Risk Preferences
21 Pages Posted: 5 Jun 2018
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.
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