On the Precautionary Motive for Savings and Prudence, in an EU and a Neu Framework

In this paper we deal with the basic two-period consumption saving problem where the first and second period consumption utility, respectively v and u is assumed to be concave as usually. Considering the usual assumption of identity of u and v, we show that prudence is fully characterized by the convexity of u' in the EU model. More interesting we prove that for the RDEU model, prudence is fully characterized by the convexity of u' and strong pessimism. The paper ends by showing that for a strong risk averse RDEU decision maker, strict pessimism allows local weak prudence, whatever the sign of u'''