Higher Order Risk Preferences: New Experimental Measures, Determinants and Related Field Behavior

Abstract

We study higher order risk preferences (prudence and temperance) in an experiment with 658 adolescents. Using a novel method to elicit and measure these preferences, we show that women are more risk averse, prudent and temperant than men, and high-ability students behave less risk averse and temperant. In line with theoretical predictions, we then find that higher order risk preferences - particularly prudence - are strongly related to adolescents’ financial decision making, environmentally-friendly behavior, and health status, including addictive behavior. Dropping higher order risk preferences from the analysis would yield largely misleading conclusions about the relation of risk aversion to field behavior.