Exploring the Consistency of Higher Order Risk Preferences

Abstract

This study measures higher order risk preferences and their consistency. We explore the role of country differences, the variation of stakes, and the framing of lotteries. We observe a robust dichotomous pattern of choice behavior in China, the United States, and Germany. The majority of choices are consistent with mixed risk aversion or mixed risk‐loving behavior. We also find this pattern after a 10‐fold increase in the stakes. Finally, our results reveal that this pattern is strengthened if the lotteries are displayed in compound instead of reduced form. In a follow‐up study, we explore potential explanations for this framing effect.

The development of risk aversion and prudence in Chinese children and adolescents

“…People with one of these two preference types differ in their lottery choices in even orders but coincide in odd orders (i.e., risk averters and risk lovers are both prudent). 12 In a related study, Haering et al (2020) observe less temperate and less prudent choices in the reduced lotteries, which is consistent with the pattern observed in our study.…”

“…To facilitate understanding of the children and to simplify the determination of lottery outcomes, we chose to use reduced versions of their compound prudence lotteries. Reducing compound lotteries has been found to influence elicited risk aversion byHarrison et al (2015), as well as prudence and temperance byDeck and Schlesinger (2018) andHaering et al (2020; Deck and Schlesinger (2018). observe less temperate choices in the reduced than in the compound lotteries byDeck and Schlesinger (2014).13 As shown inTable E.1 of Online Appendix E, we find the same pattern in both primary schools.…”

“…4 In the design of our elicitation method, we build on Deck and Schlesinger's (2014) study. They have developed 38 random lottery pairs that allow measuring first to sixth order risk preferences that are also used in subsequent studies (Deck and Schlesinger 2018;Haering et al 2020). We select seven of their lottery pairs: one first-order dominance task, three risk aversion tasks and three prudence tasks.…”

“…Based on these definitions, risk aversion and prudence have been measured in a series of papers (see Trautmann and van de Kuilen (2018) for a survey). Most of these papers elicit risk preferences in the gain domain using choices between lottery pairs (Ebert and Wiesen 2011;Noussair et al 2014;Deck and Schlesinger 2014;Breaban et al 2016;Haering et al 2020;Ebert and van de Kuilen 2017;Baillon et al 2018). Some alternatively elicit risk and prudence premia using a multiple price list (Ebert and Wiesen 2014;Heinrich and Mayrhofer 2018) or elicit preferences in the loss domain (Maier and Rüger 2012;Bleichrodt and van Bruggen 2018).…”

Financial and non-financial risk attitudes: What does it matter?

“…After the paper by Eeckhoudt and Schlesinger (2006), in the last few years a fair number of experimental investigations have been performed on the idea of preference for higher moments of the return distribution (for a comprehensive review see Gollier et al, 2013, and. For instance, Astebro et al (2009), Schlesinger (2010, 2018), Ebert andWiesen (2011, 2014), Maier and Ruger (2012), Noussair et al (2014), Haering et al (2017) and Baillon et al (2018) find support for prudence. Even if Brünner et al (2011) find a high degree of heterogeneity about preference for a higher third moment, to sum up, the evidence that the majority of people are prudent is robust.…”