Abstract
Under expected utility, prudence is equivalent to a positive third derivative of utility and plays a crucial role in precautionary saving behaviour. Eeckhoudt and Schlesinger (2006) proposed behavioural definitions of prudence and of higher order risk preferences. The present article proposes a similar definition for prudence with respect to ambiguity, i.e. situations in which objective probabilities are not available. Implications for several ambiguity models are derived. Ambiguity prudence is implied by Hansen and Sargent’s (2001) multiplier preferences, empirically correlates with financial behaviour and plays a key role in prevention behaviour.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
