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On the interaction of risk and time preferences: An experimental study

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  • Anderhub, Vital
  • Gneezy, Uri
  • Güth, Werner
  • Sonsino, Doron

Abstract

Experimental studies of risk and time-preference typically focus on one of the two phenomena. The goal of this paper is to investigate the (possible) correlation between subjects' attitude to risk and their time-preference. For this sake we ask 61 subjects to price a simple lottery in 3 different scenarios. At the first, the lottery premium is paid now. At the second, it is paid later. At the third, it is paid even later. By comparing the certainty equivalents offered by the subjects for the three lotteries, we test how time and risk preferences are interrelated. Since the time interval between now and later is the same as between later and even later, we also test the hypothesis of hyperbolic discounting. The main result is a statistically significant negative correlation between subjects' degrees of risk aversion and their (implicit) discount factors. --

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Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 1999,65.

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Date of creation: 1999
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Handle: RePEc:zbw:sfb373:199965

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  1. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, Springer, vol. 1(1), pages 7-59, March.
  2. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, Elsevier, vol. 8(3), pages 201-207.
  3. Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(2), pages 573-97, May.
  4. David I. Laibson, 1996. "Hyperbolic Discount Functions, Undersaving, and Savings Policy," NBER Working Papers 5635, National Bureau of Economic Research, Inc.
  5. Drazen Prelec & George Loewenstein, 1991. "Decision Making Over Time and Under Uncertainty: A Common Approach," Management Science, INFORMS, INFORMS, vol. 37(7), pages 770-786, July.
  6. Keren, Gideon & Roelofsma, Peter, 1995. "Immediacy and Certainty in Intertemporal Choice," Organizational Behavior and Human Decision Processes, Elsevier, Elsevier, vol. 63(3), pages 287-297, September.
  7. Hey, John D & Dardanoni, Valentino, 1987. "Optimal Consumption under Uncertainty: An Experimental Investigation," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 98(390), pages 105-16, Supplemen.
  8. Amiram Gafni & George W. Torrance, 1984. "Risk Attitude and Time Preference in Health," Management Science, INFORMS, INFORMS, vol. 30(4), pages 440-451, April.
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