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A Relationship Between Risk and Time Preferences

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  • Kota Saito
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    Abstract

    This paper investigates a general relationship between risk and time preferences. I consider a decision maker who chooses between consumption of a particular prize in one period and a different prize in another period. The individual believes that today’s good is certain, and that, as the promised date for a future good becomes increasingly distant, the probability of his consuming the good decreases. Under these assumptions, this paper shows that the individuals exhibits the common ratio effect, the certainty effect, and the expected utility if and only if he discounts hyperbolically, quasi-hyperbolically and exponentially, respectively.

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    File URL: http://www.kellogg.northwestern.edu/research/math/papers/1477.pdf
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    Bibliographic Info

    Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1477.

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    Date of creation: Aug 2009
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    Handle: RePEc:nwu:cmsems:1477

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    Related research

    Keywords: Allais paradox; hyperbolic discounting;

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    Cited by:
    1. Kontek, Krzysztof, 2010. "Linking Decision and Time Utilities," MPRA Paper 27541, University Library of Munich, Germany.

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