Arbeitspapier

An experimental methodology testing for prudence and third-order preferences

We propose an experimental method to test individuals for prudence (i.e. downside risk aversion) outside the expected utility framework. Our method relies on a novel representation of compound lotteries which allows for a systematic parameterization that captures the full generality of prudence. Therefore, we develop a general technique for lottery calibration in experiments. Since we investigate a very subtle third-order property we test our method in the laboratory employing a factorial design. We find that it yields robust results and that prudence is observed on the aggregate as well as on the individual level. Further we show that preferences based on statistical moments, in particular skewness seeking, can at most approximately explain individuals' behavior in the experiment.

Language
Englisch

Bibliographic citation
Series: Bonn Econ Discussion Papers ; No. 21/2009

Classification
Wirtschaft
Criteria for Decision-Making under Risk and Uncertainty
Design of Experiments: Laboratory, Individual
Subject
Decision making under uncertainty
risk preferences
prudence
downside risk
statistical moments
laboratory experiment
Entscheidung bei Unsicherheit
Risikoaversion
Test

Event
Geistige Schöpfung
(who)
Ebert, Sebastian
Wiesen, Daniel
Event
Veröffentlichung
(who)
University of Bonn, Bonn Graduate School of Economics (BGSE)
(where)
Bonn
(when)
2009

Handle
Last update
10.03.2025, 11:42 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Ebert, Sebastian
  • Wiesen, Daniel
  • University of Bonn, Bonn Graduate School of Economics (BGSE)

Time of origin

  • 2009

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