Julien Jacob, Marielle Brunette, Louis Eeckhoudt

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

Volume 178 () / Issue 2, pp. 130-169 (40)
Published 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 No current data available.

Marielle Brunette No current data available.

Louis Eeckhoudt No current data available.