The Reflection Effect for Higher-Order Risk Preferences

Han Bleichrodt, Paul van Bruggen

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

Higher-order risk preferences are important determinants of economic behavior. We apply insights from behavioral economics: we measure higher-order risk preferences for pure gains and losses. We find a reflection effect not only for second-order risk preferences, as did Kahneman and Tversky (1979), but also for higher-order risk preferences: we find risk aversion, prudence and intemperance for gains and much more risk-loving preferences, imprudence and temperance for losses. These findings are at odds with a universal preference for combining good with bad or good with good, which previous results suggest may underlie higher-order risk preferences.
Original languageEnglish
Pages (from-to)705-717
Number of pages13
JournalReview of Economics and Statistics
Volume104
Issue number4
DOIs
Publication statusPublished - 1 Jul 2022
Externally publishedYes

Bibliographical note

Funding Information:
We are grateful to Aurélien Baillon, Olivier l’Haridon, Gijs van de Kuilen, and Peter Wakker for their comments on the manuscript; the editor, Brigitte Madrian, and two anonymous referees for their suggestions and comments; and Jingni Yang and Victoria Granger for helping us conduct the experiment. The experiment reported in this paper was partially funded by contributions from the Erasmus Research Institute of Management and the Tinbergen Institute.

Publisher Copyright:
© 2020 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Keywords

  • Attitudes
  • Aversion
  • Demand
  • Prospect-theory
  • Prudence
  • Uncertainty

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