WP 2021-09 Structural Estimation of Higher Order Risk Preferences

Posted On December 15, 2021
Categories Working Papers, WP 2021
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AUTHOR: Morten I. Lau & Hong Il Yoo

ABSTRACT: We design an experiment to elicit prudence and temperance, two higher order risk attitudes which imply skewness seeking and kurtosis aversion, respectively. We structurally estimate a non-parametric or discrete utility function which enables one to distinguish prudence and temperance from the usual notion of risk aversion associated with variance aversion. We find that the intensities of prudence and temperance vary within an individual over the income range used in our experiment. The popular risk apportionment approach, which focuses on measuring the prevalence of prudence and temperance without intensities, may mask the presence of mixed higher order risk attitudes over income.