Even (Mixed) Risk Lovers are Prudent

Crainich, David; Eeckhoudt, Louis; Trannoy, Alain

doi:10.1257/aer.103.4.1529

“…A recent paper by Crainich, Eeckhoudt and Trannoy (2012) attempts to remedy this situation by examining risk lovers. In particular, they apply the analysis from , but with the assumption that risk lovers prefer to combine "good with good" and "bad with bad."…”

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confidence: 99%

“…In particular, they apply the analysis from , but with the assumption that risk lovers prefer to combine "good with good" and "bad with bad." In particular, Crainich et al (2012) apply the analysis to 3 rd and 4 th order risk attitudes to show that risk averters also can be both prudent and intemperate. However, a comment by Ebert (2012) explains how neither prudence nor intemperance needs to follow from risk-loving behavior.…”

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confidence: 99%

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Consistency of Higher Order Risk Preferences

Deck

¹

,

Schlesinger

²

2014

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Consistency of Higher Order Risk Preferences AbstractRisk aversion (a 2nd order risk preference) is a time-proven concept in economic models of choice under risk. More recently, the higher order risk preferences of prudence (3rd order) and temperance (4th order) also have been shown to be quite important. While a majority of the population seems to exhibit both risk aversion and such higher-order risk preferences, a significant minority does not. Rather than simply dismissing this behavior, we show how both risk-loving as well as risk-averse behaviors might be generated by a simple type of basic lottery preference for either (1) combining "good" outcomes with "bad" ones, or (2) combining "good with good" and "bad with bad." We further show that this dichotomy is fairly robust at explaining higher order risk attitudes in the laboratory. In addition to our own experimental evidence, we take a second look at the extant laboratory experiments that measure higher order risk preferences and we find a fair amount of support for this dichotomy. Our own experiment is the first to look beyond 4th order risk preferences and we examine risk attitudes at even higher levels. The consistency of these results with expected utility theory and with a few non-expected utility theories is also examined.JEL-Code: C900, D800.

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“…But what about agents who are risk lovers? In a thought-provoking paper, Crainich, Eeckhoudt and Trannoy (2013) show that risk lovers can also be prudent. 12 Such behavior was supported empirically in recent experiments by Deck and Schlesinger (2014) and by Ebert and Wiesen (2014).…”

Section: But What About Mixed Risk Lovers?mentioning

confidence: 99%

“…I next show how an existing lattice structure leads to a natural precedence ordering and how this precedence ordering can be used inductively to generate higher orders of risk apportionment. Whereas the paper assumes mostly that agents are mixed risk averse, as defined in Caballé and Pomansky (1995), I also show how the lattice concept is easily extended to examine mixed risk lovers, as defined by Crainich, Eeckhoudt and Trannoy (2013).…”

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confidence: 99%

Lattices and Lotteries in Apportioning Risk

Schlesinger

¹

2015

Geneva Risk Insur Rev

2

0

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Lattices and Lotteries in Apportioning RiskAbstract Although risk aversion has been used in economic models for over 275 years, the past few decades have shown how higher order risk attitudes are also quite important. A behavioral approach to defining such risk attitudes was developed by Eeckhoudt and Schlesinger (2006), based upon simple lottery preference. This article show how the mathematics of lattice theory can be used to model these lottery preferences. In addition to modeling a simple lattice structure, I show how such lattices can be extended in order to develop a better understanding of higher order risk attitudes.JEL-Code: D810.

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