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

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Author Info

  • Bernard M.S. van Praag

    ()
    (University of Amsterdam)

  • Adam S. Booij

    ()
    (University of Amsterdam)

Abstract

In this paper we analyze a large sample of individual responses to six lottery questions. Wederive a simultaneous estimate of risk aversion γ and the time preference discount rate ρ perindividual. This can be done because the consumption of a large prize is smoothed over a largertime period. It is found that ρ and γ strongly vary over individuals, while they are negativelycorrelated with a correlation coefficient of -.3. Furthermore we explain γ and ρ by income,age, gender, entrepreneurship and an obesity index. Very significant effects are found. If weexplain γ in a simple model where time discounting is ignored, we find completely differentestimates for γ . We conclude that in the case of lotteries with big prizes a simultaneous estimateof γ and ρ is needed in order to avoid misspecification.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-018/3.

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Date of creation: 03 Mar 2003
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Handle: RePEc:dgr:uvatin:20030018

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Keywords: Expected Utility; Risk Aversion; Time Preference; Lotteries; Hypothetical Questions.;

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References

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  1. Read, Daniel, 2001. " Is Time-Discounting Hyperbolic or Subadditive?," Journal of Risk and Uncertainty, Springer, vol. 23(1), pages 5-32, July.
  2. Donkers, Bas & Melenberg, Bertrand & Van Soest, Arthur, 2001. " Estimating Risk Attitudes Using Lotteries: A Large Sample Approach," Journal of Risk and Uncertainty, Springer, vol. 22(2), pages 165-95, March.
  3. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  4. Maurice Obstfeld, 1995. "Evaluating Risky Consumption Paths: The Role of Intertemporal Substitutability," NBER Technical Working Papers 0120, National Bureau of Economic Research, Inc.
  5. Arie Kapteyn & Federica Teppa, 2002. "Subjective Measures of Risk Aversion and Portfolio Choice," Working Papers 02-03, RAND Corporation Publications Department.
  6. Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 573-97, May.
  7. Wakker, Peter & Tversky, Amos, 1993. " An Axiomatization of Cumulative Prospect Theory," Journal of Risk and Uncertainty, Springer, vol. 7(2), pages 147-75, October.
  8. Bruno Jullien & Bernard Salanié, 1997. "Estimating Preferences under Risk : The Case of Racetrack Bettors," Working Papers 97-39, Centre de Recherche en Economie et Statistique.
  9. Beetsma, Roel & Schotman, Peter C, 1998. "Measuring Risk Attitudes in a Natural Experiment: Data from the Television Game Show LINGO," CEPR Discussion Papers 1893, C.E.P.R. Discussion Papers.
  10. Trostel, Philip A & Taylor, Grant A, 2001. "A Theory of Time Preference," Economic Inquiry, Western Economic Association International, vol. 39(3), pages 379-95, July.
  11. Angelina Lazaro & Ramon Barberan & Encarnacion Rubio, 2001. "Private and social time preferences for health and money: an empirical estimation," Health Economics, John Wiley & Sons, Ltd., vol. 10(4), pages 351-356.
  12. Hartog, Joop & Ferrer-i-Carbonell, Ada & Jonker, Nicole, 2002. "Linking Measured Risk Aversion to Individual Characteristics," Kyklos, Wiley Blackwell, vol. 55(1), pages 3-26.
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Cited by:
  1. van Winden, Frans & Krawczyk, Michal & Hopfensitz, Astrid, 2011. "Investment, resolution of risk, and the role of affect," Journal of Economic Psychology, Elsevier, vol. 32(6), pages 918-939.
  2. Anderson, C. Leigh & Nevitte, Neil, 2006. "Teach your children well: Values of thrift and saving," Journal of Economic Psychology, Elsevier, vol. 27(2), pages 247-261, April.
  3. Booij, Adam S. & van Praag, Bernard M.S., 2009. "A simultaneous approach to the estimation of risk aversion and the subjective time discount rate," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 374-388, May.
  4. Marieka Klawitter, 2008. "The effects of sexual orientation and marital status on how couples hold their money," Review of Economics of the Household, Springer, vol. 6(4), pages 423-446, December.
  5. Lahav, Eyal & Benzion, Uri & Shavit, Tal, 2010. "Subjective time discount rates among teenagers and adults: Evidence from Israel," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 39(4), pages 458-465, August.
  6. Furdas, Marina & Kohn, Karsten, 2010. "What's the Difference?! Gender, Personality, and the Propensity to Start a Business," IZA Discussion Papers 4778, Institute for the Study of Labor (IZA).
  7. Werner Bönte & Oliver Falck & Stephan Heblich, 2007. "Demography and Innovative Entrepreneurship," Jena Economic Research Papers 2007-084, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  8. Leroux, Anke D. & Creedy, John, 2007. "Optimal land conversion and growth with uncertain biodiversity costs," Ecological Economics, Elsevier, vol. 61(2-3), pages 542-549, March.
  9. Anke D. Wurzbacher, 2004. "Dynamic Ecological Constraints to Economic Growth," Department of Economics - Working Papers Series 909, The University of Melbourne.

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