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Cover of: 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

Section: Articles
Volume 178 (2022) / Issue 2, pp. 130-169 (40)
Published 20.06.2022
DOI 10.1628/jite-2022-0009
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Summary
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.