Julien Jacob, Marielle Brunette, Louis Eeckhoudt
Prevent or Cure? Trading in the Face of Skewed Binary Lotteries
- article PDF
- available
- 10.1628/jite-2022-0009
Due to a system change, access problems and other issues may occur. We are working with urgency on a solution. We apologise for any inconvenience.
Summary
Authors/Editors
Reviews
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 L̃ A is associated with a lower magnitude and a higher probability of a loss occurring than lottery L̃ B . We show that any risk-averse decision maker will prefer L̃ A to L̃ B when the expected gain of L̃ A is higher than or equal to the expected gain of L̃ 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.