Risk Aversion and the Subjective Time Discount Rate: A Joint Approach

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Risk Aversion and the Subjective Time Discount Rate: A Joint Approach

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Bernard M.S. van Praag ()
Adam S. Booij

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Bernard M.S. van Praag

Abstract

In this paper we analyze a large sample of individual responses to six lottery questions. We derive a simultaneous estimate of risk aversion and the time preference discount rate per individual. This can be done because the consumption of a large prize is smoothed over a larger time period. It is found that both parameters strongly vary over individuals, while they are moderately negatively correlated. Furthermore we explain the estimated relative risk aversion and time preference by income, age, gender, entrepreneurship and an obesity index. Very significant effects are found. If we explain relative risk aversion in a simple model where time discounting is ignored, we find completely different estimates for this parameter. We conclude that in the case of lotteries with big prizes a simultaneous estimate of risk aversion and time preference is needed in order to avoid misspecification

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 923.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_923

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Find related papers by JEL classification:
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

This paper has been announced in the following NEP Reports:

NEP-ALL-2004-05-02 (All new papers)

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