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Higher order risk attitudes and prevention under different timings of loss

Published online by Cambridge University Press:  14 March 2025

Takehito Masuda Open the ORCID record for Takehito Masuda [Opens in a new window]  and
Eungik Lee
Takehito Masuda*
Affiliation:
Institute of Social and Economic Research, Osaka University, Mihogaoka 6-1, Ibaraki, Osaka 567-0047, Japan
Eungik Lee
Affiliation:
Department of Economics, Seoul National University, Gwanak-ro 1, Gwanak-gu Seoul, South Korea
*
tmasuda@iser.osaka-u.ac.jp
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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 the 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 can be explained by probability weighting.

Keywords

Higher order risk attitudesPrudencePreventionTiming of lossProbability weighting

JEL classification

E21: Consumption • Saving • Wealth C91: Laboratory, Individual Behavior D81: Criteria for Decision-Making under Risk and Uncertainty C92: Laboratory, Group Behavior

Information

Type
Original Paper
Information
Experimental Economics , Volume 22 , Issue 1 , 15 March 2019 , pp. 197 - 215
Copyright
Copyright © 2018 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10683-018-9588-x) contains supplementary material, which is available to authorized users.

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