Risk Preferences: Consequences for Test and Treatment Thresholds and Optimal Cut-offs

Risk attitudes include risk aversion as well as higher-order risk preferences such as prudence and temperance. Thisarticle analyzes the effects of such preferences on medical test and treatment decisions, represented either by testand treatment thresholds or—when the test result is not given—by optimal cutoff values for diagnostic tests. Fora risk-averse decision maker, effective treatment is a risk-reducing strategy since it prevents the low healthoutcome of forgoing treatment in the sick state. Compared with risk neutrality, risk aversion thus lowers both the testand the treatment threshold and decreases the optimal test cutoff value. Risk vulnerability, which combines riskaversion, prudence, and temperance, is relevant if there is a comorbidity risk: thresholds and optimal cutoff valuesdecrease even more. Since common utility functions imply risk vulnerability, our findings suggest that diagnostics inlow prevalence settings (e.g., screening) may be considered more beneficial when risk preferences are takeninto account.