A Simple Approach for Measuring Higher-Order Arrow-Pratt Coefficients of Risk Aversion

• 成果类型: Article
• 署名作者: Deck, Cary; Huang, Rachel J.; Tzeng, Larry Y.; Zhao, Lin
• 署名单位: University of Alabama System; University of Alabama Tuscaloosa; Chapman University System; Chapman University; National Central University; National Taiwan University; Southwestern University of Finance & Economics - China
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2023.02300
• 发表日期: 2025
• 关键词: Arrow-Pratt risk aversion; Risk apportionment; prudence; Temperance; laboratory experiment

摘要

Although the importance of the second-order Arrow-Pratt coefficients of risk aversion is well established, the importance of higher-order risk attitudes has only recently begun to be recognized. In this paper, we introduce a nonparametric approach to directly measure higher-order Arrow-Pratt coefficients of risk aversion in an expected utility framework using choices between compound lotteries and show how it can be easily implemented in behavioral studies. Specifically, we provide a theoretical basis for using risk apportionment to reveal the intensity of higher-order risk attitudes, and then draw upon our theoretical results to develop a simple, systematic, and generalizable procedure for eliciting higher-order Arrow-Pratt coefficients. We demonstrate our approach in a laboratory experiment and find that the modal second-order, third-order, and fourth-order Arrow-Pratt coefficients are positive and small. Further, we find that degrees of risk aversion are positively correlated across orders. Additionally, we discuss alternative implementations of our procedure.