Higher Order Risk Preferences: New Measures, Determinants and Field Behavior

Animated Graph Showing the Number of Regressions where Risk Aversion is a Significant Explanatory Variable of Field Behavior - With and without Accounting for Higher Order Risk Preferences.

Abstract

We use a novel method to elicit and measure the intensities of higher order risk preferences (prudence and temperance) in an experiment with 658 adolescents. In line with theoretical predictions, we find that the degrees of higher order risk preferences - particularly of prudence - are strongly related to adolescents' field behavior, including first and foremost health-related and addictive behavior, but also eco-friendly behavior, or financial decision making. Most importantly, we show that dropping prudence and temperance from the analysis of adolescents' field behavior would yield largely misleading conclusions about the relation of risk aversion to these domains of field behavior. Thus our paper puts previous work that ignored higher order risk preferences into an encompassing perspective and clarifies which orders of risk preferences can help understand field behavior of adolescents at this formative time in their lives.

Publication
Discussion Papers of the Max Planck Institute for Research on Collective Goods, 2020/22

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