Ruhr Economic Papers

Ruhr Economic Papers #688

Exploring the Consistency of Higher-Order Risk Preferences

by Alexander Haering, Timo Heinrich and Thomas Mayrhofer

UDE, RWI, 04/2017, 100 S./p., 8 Euro, ISBN 978-3-86788-798-4 DOI: 10.4419/86788798

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Abstract

In this study we measure higher-order risk preferences and their consistency. We explore the role of country differences, the variation of stakes, and the framing of lotteries. We observe a robust dichotomous pattern of choice behavior in China, in the USA and in Germany. A large majority of choices is consistent with a preference for either (i) combining “good” outcomes with “bad” ones or (ii) combining “good” outcomes with “good” ones. We also find this pattern after a tenfold increase in the stakes. Finally, our results reveal that this pattern is strengthened if the lotteries are displayed in compound rather than reduced form. We explore potential explanations for this framing effect.

JEL-Classification: C91, D81

Keywords: Mixed risk aversion; prudence; temperance; higher-order risk preferences

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