In this note we use the rank-dependent utility (RDU) model to analyze saving decisions. The RDU model enables us to separate the effects of pessimism and optimism on saving from that of concavity of the utility function. While pessimism induces more saving, the importance of this effect is shown to depend upon properties of the utility function such as prudence and temperance.

, , , , , , , ,,
Economic Theory
Erasmus School of Economics

Bleichrodt, H., & Eeckhoudt, L. (2005). Saving under Rank-Dependent Utility. Economic Theory, 25(2), 505–511. doi:10.1007/s00199-003-0455-3