Julien Jacob, Marielle Brunette, Louis Eeckhoudt

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

Jahrgang 178 () / Heft 2, S. 130-169 (40)
Publiziert 20.06.2022

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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 A is associated with a lower magnitude and a higher probability of a loss occurring than lottery B. We show that any risk-averse decision maker will prefer A to B when the expected gain of A is higher than or equal to the expected gain of B. However, in the opposite case, additional assumptions on individuals' prudence are required. We experimentally test our theoretical predictions, and provide applications and policy recommendations.

Julien Jacob Keine aktuellen Daten verfügbar.

Marielle Brunette Keine aktuellen Daten verfügbar.

Louis Eeckhoudt Keine aktuellen Daten verfügbar.