Higher Order Risk Attitudes, Demographics, and Financial Decisions

Charles N. Noussair, Stefan T. Trautmann, Gijs van de Kuilen
2013 The Review of Economic Studies  
We study the prevalence of the higher order risk attitudes of prudence and temperance, in a large demographically representative sample, as well as in a sample of undergraduate students. Participants make pairwise choices between lotteries of the form proposed by Eeckhoudt and Schlesinger (2006) . The choices in these lotteries isolate prudent from imprudent, and temperate from intemperate, behavior. We relate individuals' risk aversion, prudence, and temperance levels to demographics and
more » ... ial decisions. We observe that the majority of individuals' decisions are consistent with risk aversion, prudence, and temperance, in both the student and the demographically representative samples. An individual's level of prudence is predictive of his wealth, saving and borrowing behavior outside of the experiment, while temperance predicts portfolio choices. Estimates of parametric specifications of risk and prudence parameters are compared to key thresholds of theoretical models. References
doi:10.1093/restud/rdt032 fatcat:y36kzalr6bgutdmq7xmnthkjze