Higher order risk attitudes and prevention under different timings of loss: A laboratory experiment

Abstract

This paper provides experimental evidence of the role of higher order risk attitudes, especially prudence, in prevention behavior. We address the timings of loss and whether prevention presents externalities. Prudence is theoretically known to have a negative effect on prevention in the current loss and a positive impact on prevention in the future loss. Nevertheless, we find that prudence is negatively correlated with prevention regardless of the timing of the loss. This observation questions the expected utility framework in favor of prospect theory. We provide a prospect theory version of the comparative statics of prevention, in line with our observations of a high level of prudence and low level of prevention. We also find that prevention decreases when it acts as a strategic substitute between subjects, which is consistent with our theoretical results.

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