Rank-ordering of risk preferences with conventional and discrete measures

When the functional form of utility is unknown, conventional measures of risk aversion are often approximated by applying a Taylor series expansion to expected utility. This is shown to produce counterintuitive rank-orderings of risk preferences for individuals who are willing to pay equal reservation prices in lotteries with different prizes. Moreover, individuals who are unwilling to participate in favorable lotteries may be incorrectly identified as having a finite aversion to risk. Correct orderings are obtained by applying a discrete measure of relative risk aversion. The contrast between the conventional and discrete measures is illustrated with data from three Dutch surveys.