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A simultaneous approach to the estimation of risk aversion and the subjective time discount rate

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  • Booij, Adam S.
  • van Praag, Bernard M.S.

Abstract

In this paper we analyze a sample of 1832 individuals who responded to six randomly generated lottery questions that differ with respect to chance, prize and the timing of the draw. Using a model that explicitly allows for consumption smoothing, we obtain an estimate of relative risk aversion of 82. Instead, assuming consumption to be immediate gives an estimate of 2, close to what is traditionally reported, while a model of full asset integration gives estimates higher by several orders of magnitude. Our results show that estimated risk aversion is sensitive to the assumptions made with respect to the consumption profile and that it is possible to determine the level of asset integration endogenously. The average subjective time discount rate, which includes a preference for the present, equals 6 percent per month. It is found that both parameters vary strongly over individuals and that the variation can be explained by income, age, gender, and entrepreneurship, consistent with the majority of previous evidence.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 70 (2009)
Issue (Month): 1-2 (May)
Pages: 374-388

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Handle: RePEc:eee:jeborg:v:70:y:2009:i:1-2:p:374-388

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Web page: http://www.elsevier.com/locate/jebo

Related research

Keywords: Expected utility Asset integration Risk aversion Time preference Lotteries Hypothetical questions;

References

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Cited by:
  1. Tatiana Kossova & Elena Kossova & Maria Sheluntcova, 2012. "Estimating the relationship between rate of time preferences and socio-economic factors in Russia," HSE Working papers WP BRP 23/EC/2012, National Research University Higher School of Economics.
  2. van der Heijden, Eline & Klein, Tobias J. & Müller, Wieland & Potters, Jan, 2012. "Framing effects and impatience: Evidence from a large scale experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 701-711.
  3. Sundar, B. & Virmani, Vineet, . "Attitudes towards Risk of Forest Dependent Communities - Evidence from Andhra Pradesh," IIMA Working Papers WP2013-12-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
  4. Shavit, Tal & Lahav, Eyal & Benzion, Uri, 2013. "Factors affecting soldiers’ time preference: A field study in Israel," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 44(C), pages 75-84.

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