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Putting Risk in its Proper Place

30 Pages Posted: 30 Apr 2005  

Louis Eeckhoudt

Facultes Universitaires Catholiques de Mons (FUCAM)

Harris Schlesinger

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

Date Written: May 2005

Abstract

This paper examines preferences towards particular classes of lottery pairs. We show how concepts such as prudence and temperance can be fully characterized by a preference relation over these lotteries. If preferences are defined in an expected-utility framework with differentiable utility, the direction of preference for a particular class of lottery pairs is equivalent to signing the nth derivative of the utility function. What makes our characterization appealing is its simplicity, which seems particularly amenable to experimentation.

Keywords: properness, prudence, risk apportionment, risk aversion, stochastic dominance, temperance, utility premium

JEL Classification: D81

Suggested Citation

Eeckhoudt, Louis and Schlesinger, Harris, Putting Risk in its Proper Place (May 2005). CESifo Working Paper Series No. 1462. Available at SSRN: https://ssrn.com/abstract=713282

Louis Eeckhoudt

Facultes Universitaires Catholiques de Mons (FUCAM) ( email )

Chaussee de Binche, 151
Mons 7000
Belgium

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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