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2005•Revue économiqueRequires access

The Economic Notion of Prudence

David Crainich, Louis Eeckhoudt

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Abstract

The formal definition of the term “prudence” in economics is due to Kimball [1990]. Since then the notion of prudence is linked to the choice of a level of precautionary saving while risk aversion remains perceived as a preference towards a risky situation. In this paper — after a survey of other publications than that of Kimball — we show that prudence can also be interpreted as a preference towards risk. We also show that prudence can be used to analyse insurance decisions as well as saving ones.Classification JEL: D81

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The formal definition of the term “prudence” in economics is due to Kimball [1990]. Since then the notion of prudence is linked to the choice of a level of precautionary saving while risk aversion remains perceived as a preference towards a risky situation. In this paper — after a survey of other publications than that of Kimball — we show that prudence can also be interpreted as a preference towards risk. We also show that prudence can be used to analyse insurance decisions as well as saving ones.Classification JEL: D81

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Available abstract

The formal definition of the term “prudence” in economics is due to Kimball [1990]. Since then the notion of prudence is linked to the choice of a level of precautionary saving while risk aversion remains perceived as a preference towards a risky situation. In this paper — after a survey of other publications than that of Kimball — we show that prudence can also be interpreted as a preference towards risk. We also show that prudence can be used to analyse insurance decisions as well as saving ones.Classification JEL: D81

Key concepts: Prudence, Preference, Risk aversion (psychology), Economics, Expected utility hypothesis, Positive economics, Microeconomics, Financial economics

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