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Higher Order Risk Attitudes, Demographics, and Financial Decisions

Higher Order Risk Attitudes, Demographics, and Financial Decisions 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Economic Studies Oxford University Press

Higher Order Risk Attitudes, Demographics, and Financial Decisions

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References (34)

Publisher
Oxford University Press
Copyright
The Author 2013. Published by Oxford University Press on behalf of The Review of Economic Studies Limited.
ISSN
0034-6527
eISSN
1467-937X
DOI
10.1093/restud/rdt032
Publisher site
See Article on Publisher Site

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.

Journal

The Review of Economic StudiesOxford University Press

Published: Jan 26, 2014

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