Developing a Short Survey Module to Measure Risk Aversion and Prudence over Outcomes and Time

• Applicants: Professor Dr. Timo Heinrich; Professor Dr. Thomas Mayrhofer
• Subject Area: Economic Policy, Applied Economics
• Term: since 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 543730965

The last years have been characterized by multiple crises, such as the COVID-19 outbreak and the recent attack on Israel. These events are characterized by a low probability and a high impact. In economic theory, second-order risk aversion alone is insufficient to describe decisions under uncertainty with such highly skewed probability distributions; hence, third-order risk aversion, commonly known as prudence, becomes crucial. Additionally, with many crises, the question shifts from if an event occurs to when it will happen. In this case, risk preferences over the timing of events have to be considered. Our proposed project will foster the study of human preferences that determine how we react to the possibility of such events. Economic research on behavior under uncertainty has predominantly focused on risk aversion over outcomes, which is characterized by uncertain outcomes occurring at a known point in time. Our project shifts attention to prudence and the impact of time risk, which is characterized by known outcomes occurring at uncertain times. Prudence and risk preferences over time influence saving decisions, bargaining, public good provision or prevention decisions, for example. Unfortunately, to this date, eliciting such preferences is complex, time-consuming and thus expensive. In our project, we aim to develop a simple and accurate survey module that can be cost-effectively included into large-scale surveys. In the first step, we will elicit risk aversion and prudence over outcomes and time using model-free lottery definitions. In an experiment, participants can exchange text messages to express their reasoning over lottery choices, which we will analyze to develop candidate survey questions. In the second step, these novel questions will be validated through another experiment. The third step entails conducting large-scale surveys using our new survey module, combining evidence on risk preferences over outcomes and time with demographics and data on field behavior. Since 2004, the German Socio-economic Panel (SOEP) included short survey items on risk aversion. This boosted international empirical research on determinants and consequences of risk aversion in multiple domains. Despite the achievements of the existing survey items in the SOEP, they focus only on outcome risks in general or in specific domains like financial matters or health. Due to the theoretical relevance in many economic models, we anticipate that our proposed survey module will similarly boost research on risk preferences over time and on prudence. Our project aims to deepen our understanding of decision-making under uncertainty by broadening the available data on human preferences. The focus lies in developing cost-effective elicitation methods, providing a more nuanced view of risk preferences over outcomes and time. Ultimately, we hope not only to facilitate research in these areas but also to contribute to the design of more effective policies.

• DFG Programme: Research Grants