Abstract
This study experimentally evaluates the risk preferences of children and adolescents living in an urban Chinese environment. We use a simple binary choice task that tests risk aversion, as well as prudence. This is the first test for prudence in children and adolescents. Our results reveal that subjects from grades 5 to 11 (10 to 17 years) make mostly risk-averse and prudent choices. The choices of 3rd graders (8 to 9 years) do not differ statistically from risk neutral benchmarks, but at the same time they make mostly prudent choices. We also find evidence for a transmission of risk preferences. There is positive correlation between all children’s and their parents’ tendency to make risk-averse choices. There is also positive correlation between girls’ and their parents’ tendency to make prudent choices.
Highlights
Economic models of decision making in risky settings largely assume that a decision maker’s preferences are exogenous to the problem and exhibit a few key properties
We find evidence for a transmission of preferences: children’s risk aversion is significantly correlated with stated preferences of their parents
The last three columns show the average number of choices in line with first-order stochastic dominance, risk aversion and prudence
Summary
Economic models of decision making in risky settings largely assume that a decision maker’s preferences are exogenous to the problem and exhibit a few key properties. Journal of Risk and Uncertainty (2020) 61:263–287 utility framework implies a concave utility function. Researchers have identified a wide class of problems in which prudence (Kimball 1990) is a key property of preferences. In the expected utility framework, prudence implies that marginal utility functions are concave.. We investigated when and how these two key traits—risk aversion and prudence—emerge and are shaped during human development. We did this by experimentally testing for the presence of these traits in 362 Chinese children and adolescents aged 8 to 17 years and examining the correlation of these results with same tests for their parents—collected as hypotheticals in a survey—as well as with cognitive abilities and household attributes
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