Observing different orders of risk aversion

Graham Loomes, Uzi Segal

Research output: Contribution to journalArticlepeer-review

Abstract

A decision maker's attitude towards risk is said to be of order i, i=1, 2, if for every given risk ē with expected value zero, the risk premium the decision maker is willing to pay to avoid the risk tē goes with t to zero at the same order as ti. This article presents an experiment testing the order of decision makers' attitudes toward risk. Its major result is that both attitudes exist, each in significant proportions. Moreover, two classes of first-order behavior are defined. The rank-dependent model (Quiggin, 1982) belongs to one, the disappointment aversion model (Gul, 1991) to the other. We show that only the first of these two classes appears among our subjects.

Original languageEnglish
Pages (from-to)239-256
Number of pages18
JournalJournal of Risk and Uncertainty
Volume9
Issue number3
DOIs
StatePublished - Dec 1994
Externally publishedYes

Keywords

  • decision theory
  • experimental economics
  • risk attitude

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