Higher order risk attitudes, demographics, and financial decisions
Noussair,C.N. Trautmann,S.T. van de Kuilen,G.
Noussair,C.N.
Trautmann,S.T.
van de Kuilen,G.
Abstract
We study the prevalence of the higher order risk attitudes of prudence and temperance in an experiment with a large demographically representative sample of participants. Under expected utility, prudence and temperance are defined by a convex first, and concave second, derivative of the utility function, and have direct implications for saving behaviour and portfolio choice. In the experiment, participants make pairwise choices that distinguish prudent from imprudent, and temperate from intemperate, behaviour. We correlate individuals' risk aversion, prudence, and temperance levels to their demographic profiles and their financial decisions outside the experiment. We observe that the majority of individuals' decisions are consistent with risk aversion, prudence, and temperance. Prudence is positively correlated with saving, as predicted by precautionary saving theory. Temperance is negatively correlated with the riskiness of portfolio choices.
Description
Date
2014-01
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
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Journal Issue
Keywords
Prudence, Temperance, Experiment, C91 - Laboratory, Individual Behavior, C93 - Field Experiments, D14 - Household Saving; Personal Finance, D81 - Criteria for Decision-Making under Risk and Uncertainty, E21 - Consumption ; Saving ; Wealth
Citation
Noussair, C N, Trautmann, S T & van de Kuilen, G 2014, 'Higher order risk attitudes, demographics, and financial decisions', Review of Economic Studies, vol. 81, no. 1, pp. 325-355. https://doi.org/10.1093/restud/rdt032