Higher order risk attitudes, demographics, and financial decisions

Charles N. Noussair, Stefan T. Trautmann, Gijs Van De Kuilen

Research output: Contribution to journalArticlepeer-review

157 Scopus citations

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.

Original languageEnglish (US)
Article numberrdt032
Pages (from-to)325-355
Number of pages31
JournalReview of Economic Studies
Volume81
Issue number1
DOIs
StatePublished - Jan 2014
Externally publishedYes

Keywords

  • Experiment
  • Prudence
  • Temperance

ASJC Scopus subject areas

  • Economics and Econometrics

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