Experimental Economics

, Volume 22, Issue 1, pp 197–215 | Cite as

Higher order risk attitudes and prevention under different timings of loss

  • Takehito MasudaEmail author
  • Eungik Lee
Original Paper


This paper provides experimental evidence of the role of higher order risk attitudes—especially prudence—in prevention behavior. Prudence, under an expected utility framework, increases (decreases) self-protection effort compared to the risk neutral level when the risk of losing part of an income exists in a future (the same) period. Motivated by these predictions that give the exact test on prudence, an experiment was designed where subjects go through higher order risk attitude elicitation and make a self-protection decision. In contrast to the expected utility theory, the observed efforts are less than the risk neutral level, regardless of the timing of loss. This violation of expected utility predictions can be explained by probability weighting.


Higher order risk attitudes Prudence Prevention Timing of loss Probability weighting 

JEL Classification

C91 C92 D81 E21 



We sincerely thank Charles Noussair for his continuous encouragement and helpful suggestions, which improved our paper significantly. We thank Soo Hong Chew, Syngjoo Choi, Nobuyuki Hanaki, Stefan Trautmann, Songfa Zhong, the participants of 2017 ESA North American Meeting, the University of Arizona experimental reading group, and the SURE workshop at Seoul National University. Sebastian Ebert kindly shared with us their z-Tree programs. Masuda completed most of this study during his visit to the Economic Science Laboratory at the University of Arizona. We gratefully acknowledge the financial support received from JSPS KAKENHI Grant Number 17K13701, 15H05728, the Keihanshin Consortium for Fostering the Next Generation of Global Leaders in Research (K-CONNEX), the John-Mung Overseas Program, and the Murata Science Foundation. Lee acknowledges funding from the BK21Plus Program of the Ministry of Education and National Research Foundation of Korea (NRF-21B20130000013).

Supplementary material

10683_2018_9588_MOESM1_ESM.docx (1.2 mb)
Supplementary material 1 (DOCX 1178 kb)


  1. Bleichrodt, H., & van Bruggen, P. (2018). Higher order risk preferences for gains and losses. Working Paper.Google Scholar
  2. Cardella, E., & Kitchens, C. (2017). The impact of award uncertainty on settlement negotiations. Experimental Economics, 20(2), 333–367.CrossRefGoogle Scholar
  3. Courbage, C., Rey, B., & Treich, N. (2013). Prevention and precaution. Handbook of insurance (pp. 185–204). New York, NY: Springer.CrossRefGoogle Scholar
  4. Deck, C., & Schlesinger, H. (2010). Exploring higher order risk effects. The Review of Economic Studies, 77(4), 1403–1420.CrossRefGoogle Scholar
  5. Deck, C., & Schlesinger, H. (2014). Consistency of higher order risk preferences. Econometrica, 82(5), 1913–1943.CrossRefGoogle Scholar
  6. Ebert, S., & Wiesen, D. (2011). Testing for prudence and skewness seeking. Management Science, 57(7), 1334–1349.CrossRefGoogle Scholar
  7. Ebert, S., & Wiesen, D. (2014). Joint measurement of risk aversion, prudence, and temperance. Journal of Risk and Uncertainty, 48(3), 231–252.CrossRefGoogle Scholar
  8. Eckel, C. C., & Grossman, P. J. (2008). Men, women and risk aversion: Experimental evidence. Handbook of Experimental Economics Results, 1, 1061–1073.CrossRefGoogle Scholar
  9. Eeckhoudt, L., & Gollier, C. (2005). The impact of prudence on optimal prevention. Economic Theory, 26(4), 989–994.CrossRefGoogle Scholar
  10. Eeckhoudt, L. R., Laeven, R. J., & Schlesinger, H. (2017). Risk apportionment: The dual story. arXiv preprint arXiv:1712.02182.
  11. Eeckhoudt, L., & Schlesinger, H. (2006). Putting risk in its proper place. The American Economic Review, 96(1), 280–289.CrossRefGoogle Scholar
  12. Fischbacher, U. (2007). z-Tree: Zurich toolbox for ready-made economic experiments. Experimental Economics, 10(2), 171–178.CrossRefGoogle Scholar
  13. Gollier, C. (2004). The economics of risk and time. Cambridge: MIT Press.Google Scholar
  14. Gollier, C., Hammitt, J. K., & Treich, N. (2013). Risk and choice: A research saga. Journal of Risk and Uncertainty, 47(2), 129–145.CrossRefGoogle Scholar
  15. Gollier, C., Jullien, B., & Treich, N. (2000). Scientific progress and irreversibility: an economic interpretation of the ‘Precautionary Principle’. Journal of Public Economics, 75(2), 229–253.CrossRefGoogle Scholar
  16. Greiner, B. (2015). Subject pool recruitment procedures: organizing experiments with ORSEE. Journal of the Economic Science Association, 1(1), 114–125.CrossRefGoogle Scholar
  17. Haering, A., Heinrich, T., & Mayrhofer, T. (2017). Exploring the consistency of higher-order risk preferences (No. 688). Ruhr Economic Papers.Google Scholar
  18. Heinrich, T., & Mayrhofer, T. (2018). Higher-order risk preferences in social settings. Experimental Economics, 21(2), 434–445.CrossRefGoogle Scholar
  19. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–292.CrossRefGoogle Scholar
  20. Kimball, M. S. (1990). Precautionary saving in the small and in the large. Econometrica, 58(1), 53–73.CrossRefGoogle Scholar
  21. Kocher, M. G., Pahlke, J., & Trautmann, S. T. (2015). An experimental study of precautionary bidding. European Economic Review, 78, 27–38.CrossRefGoogle Scholar
  22. Krieger, M., & Mayrhofer, T. (2017). Prudence and prevention: An economic laboratory experiment. Applied Economics Letters, 24(1), 19–24.CrossRefGoogle Scholar
  23. Leland, H. E. (1968). Saving and uncertainty: The precautionary demand for saving. The Quarterly Journal of Economics, 82(3), 465–473.CrossRefGoogle Scholar
  24. Menegatti, M. (2009). Optimal prevention and prudence in a two-period model. Mathematical Social Sciences, 58(3), 393–397.CrossRefGoogle Scholar
  25. Noussair, C. N., Trautmann, S. T., & Van de Kuilen, G. (2014). Higher order risk attitudes, demographics, and financial decisions. Review of Economic Studies, 81(1), 325–355.CrossRefGoogle Scholar
  26. Peter, R. (2017). Optimal self-protection in two periods: On the role of endogenous saving. Journal of Economic Behavior & Organization, 137, 19–36.CrossRefGoogle Scholar
  27. Prelec, D. (1998). The probability weighting function. Econometrica, 66(3), 497–527.CrossRefGoogle Scholar
  28. Schmidt, U., Starmer, C., & Sugden, R. (2008). Third-generation prospect theory. Journal of Risk and Uncertainty, 36(3), 203.CrossRefGoogle Scholar
  29. Stott, H. P. (2006). Cumulative prospect theory’s functional menagerie. Journal of Risk and Uncertainty, 32(2), 101–130.CrossRefGoogle Scholar
  30. Trautmann, S. T., & van de Kuilen, G. (2018). Higher order risk attitudes: A review of experimental evidence. European Economic Review, 103, 108–124.CrossRefGoogle Scholar
  31. Tversky, A., & Kahneman, D. (1992). Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5(4), 297–323.CrossRefGoogle Scholar
  32. Wakker, P. P. (2010). Prospect theory: For risk and ambiguity. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  33. White, L. (2008). Prudence in bargaining: The effect of uncertainty on bargaining outcomes. Games and Economic Behavior, 62(1), 211–231.CrossRefGoogle Scholar

Copyright information

© Economic Science Association 2018

Authors and Affiliations

  1. 1.Institute of Social and Economic ResearchOsaka UniversityIbarakiJapan
  2. 2.Department of EconomicsSeoul National UniversitySeoulSouth Korea

Personalised recommendations