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Disentangling Intertemporal Substitution and Risk Aversion Under the Expected Utility Theorem

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  • Oscar Lau C.

    (Massey University, School of Economics and Finance, Social Sciences Tower - SST4.09Palmerston North 4442, New Zealand)

Abstract

This paper presents an axiomatic approach to separately control for the attitudes toward intertemporal substitution and risk aversion under the expected utility theorem. The standard time-separable form is recovered only if the functions dictating the two attitudes are identical. Risk aversion is defined on consumption amount rather than on utility (as in Kihlstrom and Mirman (1974 and 1981)). Moreover, the agent is allowed to trade his lottery outcome to optimize his consumption. As a result, this approach provides a straightforward extension of the familiar Arrow-Pratt results to multiple periods. These include categorizing, measuring, and comparing risk aversions.

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  • Oscar Lau C., 2019. "Disentangling Intertemporal Substitution and Risk Aversion Under the Expected Utility Theorem," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 19(2), pages 1-14, June.
    • Handle: RePEc:bpj:bejtec:v:19:y:2019:i:2:p:14:n:1
    DOI: 10.1515/bejte-2016-0150
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    Cited by:

    1. John Armstrong & Cristin Buescu, 2019. "Collectivised Post-Retirement Investment," Papers 1909.12730, arXiv.org, revised Apr 2020.

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    More about this item

    Keywords

    intertemporal substitution; risk aversion; expected utility theorem;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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