Disponible uniquement en anglais.
Publication de l’article Prevent or Cure? Trading in the Face of Skewed Binary Lotteries par Julien Jacob, Marielle Brunette et Louis Eeckhoudt dans la revue Journal of Institutional and Theoretical Economics (JITE).
Volume 178 (2022) / Issue 2, pp. 130-169 (40)
DOI: 10.1628/jite-2022-0009
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.