Risk Aversion, Prudence and Temperance in Gain and Loss: are we all Schizophrenics?

In this paper, our aims are of three orders: i) to characterize the individuals’ preferences towards risk, prudence and temperance in the gain and loss domain; ii) to analyze potential correlations between domains, for a given feature of preferences, and between features, for a given domain; iii) to identify potential determinants of these individual preferences. For that purpose, we conducted a lab experiment eliciting risk aversion, prudence and temperance in the two domains and collected information about individuals’ characteristics. First, our results indicate that participants are risk averse, prudent and temperate in the gain domain while risk averse, imprudent and temperate in the loss domain. Second, we observed that risk aversion in the gain and loss domains is positively and significantly correlated. The same result applies for prudence and temperance. We also identified that behaviors in terms of risk aversion, prudence and temperance are all bilaterally correlated in the gain and loss domains, except for risk aversion and temperance in the gain domain. Finally, we found that the determinants of the individual’s preferences generally depend on the domain and the feature.