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Risk Preferences at Different Time Periods: An Experimental Investigation

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Author Info

  • Mohammed Abdellaoui

    ()
    (GREGHEC-CNRS, HEC-Paris, 78351 Jouy en Josas, France)

  • Enrico Diecidue

    ()
    (INSEAD, 77305 Fontainebleau, France)

  • Ayse Öncüler

    ()
    (ESSEC Business School, 95021 Cergy, France)

Abstract

Intertemporal decision making under risk involves two dimensions: time preferences and risk preferences. This paper focuses on the impact of time on risk preferences, independent of the intertemporal trade-off of outcomes, i.e., time preferences. It reports the results of an experimental study that examines how delayed resolution and payment of risky options influence individual choice. We used a simple experimental design based on the comparison of two-outcome monetary lotteries with the same delay. Raw data clearly reveal that subjects become more risk tolerant for delayed lotteries. Assuming a prospect theory-like model under risk, we analyze the impact of time on utility and decision weights, independent of time preferences. We show that the subjective treatment of outcomes (i.e., utility) is not significantly affected by time. In fact, the impact of time is completely absorbed by the probability weighting function. The effect of time on risk preferences was found to generate probabilistic optimism resulting in a higher risk tolerance for delayed lotteries. This paper was accepted by Teck Ho, decision analysis.

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File URL: http://dx.doi.org/10.1287/mnsc.1110.1324
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 57 (2011)
Issue (Month): 5 (May)
Pages: 975-987

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Handle: RePEc:inm:ormnsc:v:57:y:2011:i:5:p:975-987

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Related research

Keywords: time preferences; risk preferences; delayed lotteries; attitude toward risk; utility; decision weights; optimism; sensitivity to probabilities;

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Cited by:
  1. Arthur E. Attema & Werner B.F. Brouwer & Olivier L'Haridon, 2013. "Prospect theory in the health domain: A quantitative assessment," Post-Print halshs-00866788, HAL.
  2. Thomas Epper & Helga Fehr-Duda, 2012. "The missing link: Unifying risk taking and time discounting," ECON - Working Papers 096, Department of Economics - University of Zurich.
  3. Hammond, Peter J & Zank, Horst, 2013. "Rationality and Dynamic Consistency under Risk and Uncertainty," The Warwick Economics Research Paper Series (TWERPS) 1033, University of Warwick, Department of Economics.
  4. Thomas Epper & Helga Fehr-Duda & Adrian Bruhin, 2011. "Viewing the future through a warped lens: Why uncertainty generates hyperbolic discounting," Journal of Risk and Uncertainty, Springer, vol. 43(3), pages 169-203, December.

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