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Putting Risk in Its Proper Place

Putting Risk in Its Proper Place Abstract This paper examines preferences toward particular classes of lottery pairs. We show how such concepts as prudence and temperance can be fully characterized by a preference relation over these lotteries. If preferences are defined in an expectedutility framework with differentiable utility, the direction of preference for a particular class of lottery pairs is equivalent to signing the n th derivative of the utility function. What makes our characterization appealing is its simplicity, which seems particularly amenable to experimentation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Putting Risk in Its Proper Place

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Publisher
American Economic Association
Copyright
Copyright © 2006 by the American Economic Association
Subject
Articles
ISSN
0002-8282
DOI
10.1257/000282806776157777
Publisher site
See Article on Publisher Site

Abstract

Abstract This paper examines preferences toward particular classes of lottery pairs. We show how such concepts as prudence and temperance can be fully characterized by a preference relation over these lotteries. If preferences are defined in an expectedutility framework with differentiable utility, the direction of preference for a particular class of lottery pairs is equivalent to signing the n th derivative of the utility function. What makes our characterization appealing is its simplicity, which seems particularly amenable to experimentation.

Journal

American Economic ReviewAmerican Economic Association

Published: Mar 1, 2006

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