Cover von: Prevent or Cure? Trading in the Face of Skewed Binary Lotteries
Julien Jacob, Marielle Brunette, Louis Eeckhoudt

Prevent or Cure? Trading in the Face of Skewed Binary Lotteries

Rubrik: Articles
Jahrgang 178 (2022) / Heft 2, S. 130-169 (40)
Publiziert 20.06.2022
DOI 10.1628/jite-2022-0009
Veröffentlicht auf Englisch.
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Beschreibung
We analyze the choice of a risk-averse decision maker who faces two lotteries that exhibit a trade-off between a reduction in the probability of a loss occurring and its magnitude. We make a theoretical analysis with skewed binary lotteries: lottery <sub>A</sub> is associated with a lower magnitude and a higher probability of a loss occurring than lottery <sub>B</sub>. We show that any risk-averse decision maker will prefer <sub>A</sub> to <sub>B</sub> when the expected gain of <sub>A</sub> is higher than or equal to the expected gain of <sub>B</sub>. However, in the opposite case, additional assumptions on individuals' prudence are required. We experimentally test our theoretical predictions, and provide applications and policy recommendations.