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In accounting, the convention of conservatism, also known as the doctrine of prudence, is a policy of anticipating possible future losses but not future gains. It states that when choosing between two solutions, the one that will be least likely to overstate assets and income should be selected.
The prudent man rule is based on common law stemming from the 1830 Massachusetts court formulation Harvard College v. Amory. [1] The prudent man rule, written by Massachusetts Justice Samuel Putnam (1768–1853), directs trustees "to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of ...
Leland (1968) introduced a simple analytical framework that builds on the prudence individuals towards risk. This is a concept that economists define as decreasing absolute risk aversion risk aversion with a convex marginal utility (U"' >0). Leland proved that, even for small variations of future income, the precautionary demand for saving exists.
Prudential capital controls are typical ways of prudential regulation that takes the form of capital controls and regulates a country's capital account inflows. Prudential capital controls aim to mitigate systemic risk, reduce business cycle volatility, increase macroeconomic stability, and enhance social welfare.
For example, distinguishing when acts are courageous, as opposed to reckless or cowardly, is an act of prudence. In modern English, the word "prudence" has become closely associated with cautiousness. In this sense, prudence is a virtue that involves taking calculated risks, but excessive caution can become a vice of cowardice.
In Trust Law, the Duty of Prudence traditionally includes the duty of a trustee to administer a trust with a degree of care, skill and caution. The degree of care required depends both on the jurisdiction on the trustee's actual or purported skill, for example if they have an accounting background (or claimed to have one), they must exercise professional care.
Macroprudential regulation is the approach to financial regulation that aims to mitigate risk to the financial system as a whole (or "systemic risk"). After the 2007–2008 financial crisis, there has been a growing consensus among policymakers and economic researchers about the need to re-orient the regulatory framework towards a macroprudential perspective.
In the utilities industry, the Prudent Investment Rule refers to a series of state standards which determine the fiscal soundness of a utility in the course of rate recovery for recoverable capital costs to be determined by that state’s Public Service Commission (PSC).