Putting Risk in Its Proper Place

Abstract

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 expectedutility framework with differentiable utility, the direction of preference for a particular class of lottery pairs is equivalent to signing the n^th derivative of the utility function. What makes our characterization appealing is its simplicity, which seems particularly amenable to experimentation.