American Economic Review: Vol. 96 No. 1 (March 2006)
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Putting Risk in Its Proper Place
Eeckhoudt, Louis, and Harris Schlesinger. 2006. "Putting Risk in Its Proper Place." American Economic Review, 96(1): 280-289.
This paper examines preferences toward particular classes of lottery pairs. We show how such concepts as prudence and temperance can be fully characterized by a preference relation over these lotteries. If preferences are defined in an expected-utility framework with differentiable utility, the direction of preference for a particular class of lottery pairs is equivalent to signing the nth derivative of the utility function. What makes our characterization appealing is its simplicity, which seems particularly amenable to experimentation.
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