Testing for Prudence and Skewness Seeking

Abstract

Numerous theoretical predictions such as precautionary saving or preventive behavior have been derived for prudent decision makers. Further, prudence can be characterized as downside risk aversion and plays a key role in preference for skewness. We use a simple experimental method to test for prudence and skewness preference in the laboratory and compare the two. To this end, we introduce a novel graphical representation of compound lotteries that is easily accessible to subjects and test it for robustness, using a factorial design. Prudence is observed on the aggregate and individual level. We find that prudence does not boil down to skewness seeking. We further provide some theoretical explanations for this result. This paper was accepted by Peter Wakker, decision analysis.decision making under risk, precautionary savings, prudence, downside risk, skewness seeking, laboratory experiment

Consistency of Higher Order Risk Preferences

“…Specifically, our evidence shows that risk aversion, prudence and temperance seem to be the more frequent risk attitudes for orders 2-4. This evidence agrees with the handful of experimental evidence to date (Tarazona-Gomez (2004), Ebert and Wiesen (2011), Ebert and Wiesen (2012), Noussair et al (2012) and Maier and Rüger (2012)). Only one paper to date, Deck and Schlesinger (2010), shows some other trait (intemperance) to be more prevalent, but only modestly so.…”

Higher-Order Risk Preferences – Consequences for Test and Treatment Thresholds and Optimal Cutoffs

“…These utility functions model risk-averse, prudent, and temperate behavior at the same time. Recent experimental evidence confirms riskaverse and prudent behavior (Deck and Schlesinger 2010;Wiesen 2011a and2011b This paper has two limitations at least. First, our model is rooted in the EU framework, which has been criticized for its insufficient capacity to predict individual behavior, especially with regard to possible probability weighting.…”

Hidden Skewness: On the Difficulty of Multiplicative Compounding Under Random Shocks

“…Security 4 is also well suited to show that participants do not simply confuse median and mean. Stating the security's mean value (8,638.06) instead of the median / mode would have resulted in an overestimation, in contrast to the LB model's prediction and to the evidence in Figure 1(d).…”

“…5 The experiment by Stutzer and Jung Grant (2010) uses a quite similar experimental wording as the experiment described in Section 3.4 and in our paper's first (2010) version despite having been developed and written independently. A separate and important experimental literature examines the preferences regarding skewness, see Deck and Schlesinger (2010), Brünner, Levinsky and Qiu (2011), Ebert and Wiesen (2011), and Eckel and Grossman (2014). We restrict this paper to the perception of the distribution, not its valuation.…”

“…The participants' task is to locate the mode of the security's outcome distribution after T = 12 periods. 8 The task is made incentive compatible as follows. After a participant's response, the experimenter simulates a set of 100 values of Y T .…”