Higher Order Risk Attitudes and Prevention Under Different Timings of Loss

Abstract

This paper provides experimental evidence of the role of higher order risk attitudes-especially prudence-in prevention behavior. Prudence, under an expected utility framework, increases (decreases) self-protection effort compared to the risk neutral level when the risk of losing part of an income exists in a future (the same) period. Motivated by these predictions that give the exact test on prudence, an experiment was designed where subjects go through higher order risk attitude elicitation and make a self-protection decision. In contrast to expected utility theory, the observed efforts are less than the risk neutral level, regardless of the timing of loss. This violation of expected utility predictions could be explained by probability weighting.

Comparing Behavior between a Large Sample of Smart Students and a Representative Sample of Japanese Adults

“…An online dictionary was available for participants to verify the meaning of the words from which they selected. We used the elicitation task originally proposed by Noussair et al (2014) and also utilized by Masuda and Lee (2019) to measure risk aversion, prudence, and temperance. We asked five questions each for risk aversion, prudence, and temperance.…”

Participants’ Characteristics at Iser-Lab in 2020

“…We used the same method as Masuda and Lee (2019) to measure risk aversion, prudence, and temperance. We ask five questions for risk aversion, ten questions for prudence, and five questions for temperance, asking which of the two lotteries they would choose.…”

Prudence and Prevention – Empirical Evidence

“…Interestingly, in their setting, risk aversion is a non-significant predictor for prevention decisions. Masuda and Lee (2019) also conducted an economic laboratory experiment. However, in contrast to Krieger and Mayrhofer (2017) they explicitly studied the impact of prudence on prevention behavior (in a self-protection context) under different timings of loss, i.e.…”

“…they tested whether prudence will decrease the likelihood to prevent when the loss may occur in the same period -thus following the theoretical results of one-period models such as in Eeckhoudt and Gollier (2005) -and whether prudence will increase the likelihood to prevent when the loss may occur in the future -thus following the theoretical results of two-period models such as in Menegatti (2009). Masuda and Lee (2019) find that prudent subjects exert less effort than risk neutral players regardless of the timing of loss.…”