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The missing link: Unifying risk taking and time discounting

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  • Thomas Epper
  • Helga Fehr-Duda

Abstract

Almost all important decisions in people’s lives entail risky and delayed consequences. Regardless of whether we make choices involving health, wealth, love or education, almost every choice involves costs and benefits that are uncertain and materialize over time. Because risk and delay often arise simultaneously, theories of decision making should be capable of explaining how behavior under risk and over time interacts. There is, in fact, a growing body of evidence indicating important interactions between behaviorally revealed risk tolerance and patience. Risk taking behavior is delay dependent, and time discounting is risk dependent. Here we show that the inherent uncertainty of future events conjointly with people’s proneness to weight probabilities nonlinearly generates a unifying framework for explaining time-dependent risk taking, risk-dependent time discounting, preferences for late resolution of uncertainty, and several other puzzling interaction effects between risk and time.

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Bibliographic Info

Paper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 096.

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Date of creation: Nov 2012
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Handle: RePEc:zur:econwp:096

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Keywords: Risk taking; time discounting; probability weighting; decreasing impatience; increasing risk tolerance; preference for late resolution of uncertainty; preference for one-shot resolution of uncertainty;

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Cited by:
  1. Drichoutis, Andreas & Nayga, Rodolfo, 2013. "A reconciliation of time preference elicitation methods," MPRA Paper 46916, University Library of Munich, Germany, revised 12 May 2013.
  2. Riedl A.M. & Wölbert E.M., 2013. "Measuring Time and Risk Preferences: Reliability, Stability, Domain Specificity," Research Memorandum 041, Maastricht University, Graduate School of Business and Economics (GSBE).
  3. Mohammed Abdellaoui & Han Bleichrodt & Olivier l’Haridon, 2013. "Sign-dependence in intertemporal choice," Journal of Risk and Uncertainty, Springer, vol. 47(3), pages 225-253, December.
  4. Laurent Denant-Boèmont & Enrico Diecidue & Olivier L'Haridon, 2013. "Patience and Time Consistency in Collective Decisions," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201329, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  5. Antoine Nebout & Marc Willinger, 2014. "Are Non-Expected Utility individuals really Dynamically Inconsistent? Experimental Evidence," Working Papers 14-08, LAMETA, Universtiy of Montpellier, revised Jul 2014.

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