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Moment characterization of higher-order risk preferences

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  • Sebastian Ebert

Abstract

This article presents a characterization of higher-order risk preferences such as prudence or temperance in terms of statistical moments. Our results, which are generalizations of Roger (Theory Decis, 70(1):27–44, 2011 ) and Ekern (Econ Lett, 6(4), 329–333, 1980 ), give a better understanding of how higher-order risk preferences relate to skewness preference and kurtosis aversion. While they are not based on expected utility theory, an implication within that theory is that all commonly used utility functions exhibit skewness preference and kurtosis aversion. Copyright Springer Science+Business Media New York 2013

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  • Sebastian Ebert, 2013. "Moment characterization of higher-order risk preferences," Theory and Decision, Springer, vol. 74(2), pages 267-284, February.
    • Handle: RePEc:kap:theord:v:74:y:2013:i:2:p:267-284
    DOI: 10.1007/s11238-012-9307-6
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    1. Louis Eeckhoudt & Harris Schlesinger, 2006. "Putting Risk in Its Proper Place," American Economic Review, American Economic Association, vol. 96(1), pages 280-289, March.
    2. Cary Deck & Harris Schlesinger, 2010. "Exploring Higher Order Risk Effects," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(4), pages 1403-1420.
    3. Caballe, Jordi & Pomansky, Alexey, 1996. "Mixed Risk Aversion," Journal of Economic Theory, Elsevier, vol. 71(2), pages 485-513, November.
    4. Charles N. Noussair & Stefan T. Trautmann & Gijs van de Kuilen, 2014. "Higher Order Risk Attitudes, Demographics, and Financial Decisions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(1), pages 325-355.
    5. Sebastian Ebert & Daniel Wiesen, 2011. "Testing for Prudence and Skewness Seeking," Management Science, INFORMS, vol. 57(7), pages 1334-1349, July.
    6. Patrick Roger, 2011. "Mixed risk aversion and preference for risk disaggregation: a story of moments," Theory and Decision, Springer, vol. 70(1), pages 27-44, January.
    7. Ekern, Steinar, 1980. "Increasing Nth degree risk," Economics Letters, Elsevier, vol. 6(4), pages 329-333.
    8. Sebastian Ebert & Daniel Wiesen, 2014. "Joint measurement of risk aversion, prudence, and temperance," Journal of Risk and Uncertainty, Springer, vol. 48(3), pages 231-252, June.
    9. Patrick L. Brockett & Linda L. Golden, 1987. "A Class of Utility Functions Containing all the Common Utility Functions," Management Science, INFORMS, vol. 33(8), pages 955-964, August.
    10. Menezes, C & Geiss, C & Tressler, J, 1980. "Increasing Downside Risk," American Economic Review, American Economic Association, vol. 70(5), pages 921-932, December.
    11. Lajeri-Chaherli, Fatma, 2004. "Proper prudence, standard prudence and precautionary vulnerability," Economics Letters, Elsevier, vol. 82(1), pages 29-34, January.
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    Cited by:

    1. Denuit, Michel & Rey, Beatrice, 2012. "Uni- And Multidimensional Risk Attitudes: Some Unifying Theorems," LIDAM Discussion Papers ISBA 2012014, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    2. Michail Anthropelos & Paul Schneider, 2021. "Optimal Investment and Equilibrium Pricing under Ambiguity," Swiss Finance Institute Research Paper Series 21-78, Swiss Finance Institute.
    3. Sebastian Ebert & Daniel Wiesen, 2011. "Testing for Prudence and Skewness Seeking," Management Science, INFORMS, vol. 57(7), pages 1334-1349, July.
    4. Denuit, Michel & Rey, Béatrice, 2013. "Another look at risk apportionment," Journal of Mathematical Economics, Elsevier, vol. 49(4), pages 335-343.
    5. Trautmann, Stefan T. & Kuilen, Gijs van de, 2018. "Higher order risk attitudes: A review of experimental evidence," European Economic Review, Elsevier, vol. 103(C), pages 108-124.
    6. Christophe Courbage & Henri Loubergé & Béatrice Rey, 2018. "On the properties of high-order non-monetary measures for risks," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(1), pages 77-94, May.
    7. Christophe Courbage & Béatrice Rey, 2016. "Decision Thresholds and Changes in Risk for Preventive Treatment," Health Economics, John Wiley & Sons, Ltd., vol. 25(1), pages 111-124, January.
    8. François Desmoulins-Lebeault & Luc Meunier, 2018. "Moment Risks: Investment for Self and for a Firm," Decision Analysis, INFORMS, vol. 15(4), pages 242-266, December.
    9. Colasante, Annarita & Riccetti, Luca, 2020. "Risk aversion, prudence and temperance: It is a matter of gap between moments," Journal of Behavioral and Experimental Finance, Elsevier, vol. 25(C).
    10. Ebert, Sebastian, 2015. "On skewed risks in economic models and experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 112(C), pages 85-97.
    11. Denuit, Michel & Liu, Liqun, 2013. "Decreasing higher-order absolute risk aversion and higher-degree stochastic dominance," LIDAM Discussion Papers ISBA 2013007, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    12. Ñíguez, Trino-Manuel & Perote, Javier, 2016. "Multivariate moments expansion density: Application of the dynamic equicorrelation model," Journal of Banking & Finance, Elsevier, vol. 72(S), pages 216-232.
    13. Bottasso, Anna & Duchêne, Sébastien & Guerci, Eric & Hanaki, Nobuyuki & Noussair, Charles N., 2022. "Higher order risk attitudes of financial experts," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    14. Zaixing Li & Fei Chen & Lixing Zhu, 2017. "Estimating moments in ANOVA-type mixed models," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 80(6), pages 697-715, November.
    15. Markus Dertwinkel-Kalt & Mats Köster, 2020. "Salience and Skewness Preferences [Risk-neutral Firms can Extract Unbounded Profits from Consumers with Prospect Theory Preferences]," Journal of the European Economic Association, European Economic Association, vol. 18(5), pages 2057-2107.
    16. Ñíguez, Trino-Manuel & Paya, Ivan & Peel, David, 2016. "Pure higher-order effects in the portfolio choice model," Finance Research Letters, Elsevier, vol. 19(C), pages 255-260.
    17. Brice Corgnet & Roberto Hernán González, 2023. "On The Appeal Of Complexity," Working Papers 2312, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    18. León, Angel & Moreno, Manuel, 2017. "One-sided performance measures under Gram-Charlier distributions," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 38-50.
    19. Michel Denuit & Liqun Liu, 2014. "Decreasing higher-order absolute risk aversion and higher-degree stochastic dominance," Theory and Decision, Springer, vol. 76(2), pages 287-295, February.
    20. Mirko S. Heinle & Kevin C. Smith, 2017. "A theory of risk disclosure," Review of Accounting Studies, Springer, vol. 22(4), pages 1459-1491, December.
    21. Chin Hon Tan & Chunling Luo, 2017. "Clear Preferences Under Partial Distribution Information," Decision Analysis, INFORMS, vol. 14(1), pages 65-73, March.
    22. Thomas Åstebro & José Mata & Luís Santos-Pinto, 2015. "Skewness seeking: risk loving, optimism or overweighting of small probabilities?," Theory and Decision, Springer, vol. 78(2), pages 189-208, February.

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    More about this item

    Keywords

    Decision making under risk; Higher-order risk preferences; Kurtosis aversion; Mixed risk aversion; Moments; Prudence; Skewness preference; D81;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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