Risk Aversion and the Subjective Time Discount Rate: A Joint Approach
AbstractIn 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 InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-018/3.
Date of creation: 03 Mar 2003
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Expected Utility; Risk Aversion; Time Preference; Lotteries; Hypothetical Questions.;
Other versions of this item:
- Bernard M.S. van Praag & Adam S. Booij, 2003. "Risk Aversion and the Subjective Time Discount Rate: A Joint Approach," CESifo Working Paper Series 923, CESifo Group Munich.
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- D90 - Microeconomics - - Intertemporal Choice - - - General
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
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