Prudence in Economics
Economists say that a consumer is 'prudent' if he or she saves more when faced with riskier future income. This additional saving is called precautionary saving. Prudence is closely related to risk aversion. The difference is that saying a consumer is risk averse merely implies that he or she dislikes facing risk, whereas prudence implies that the consumer takes action to offset the effects of the risk (namely, by increasing saving).
If a risk averse consumer has a utility function over consumption x, and if is differentiable, then the consumer is not prudent unless the third derivative of utility is positive, that is, 
.
The strength of the precautionary saving motive can be measured by absolute prudence, which is defined as 
. Similarly, relative prudence is defined as absolute prudence, multiplied by the level of consumption. These measures are closely related to the concepts of absolute and relative risk aversion developed by Kenneth Arrow and John W. Pratt.
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Famous quotes containing the words prudence in, prudence and/or economics:
“The one prudence in life is concentration; the one evil is dissipation: and it makes no difference whether our dissipations are coarse or fine; property and its cares, friends and a social habit, or politics, or music, or feasting. Everything is good which takes away one plaything and delusion more, and drives us home to add one stroke of faithful work.”
—Ralph Waldo Emerson (1803–1882)
“The world is filled with the proverbs and acts and winkings of a base prudence, which is a devotion to matter, as if we possessed no other faculties than the palate, the nose, the touch, the eye and ear; a prudence which adores the Rule of Three, which never subscribes, which never gives, which seldom lends, and asks but one question of any project,—Will it bake bread?”
—Ralph Waldo Emerson (1803–1882)
“I am not prepared to accept the economics of a housewife.”
—Jacques Chirac (b. 1932)