Risk Aversion and Planning Horizons
A number of empirical studies seem to reject the additive separability of preferences that is assumed in most theoretical models of the life cycle. We show that, when additive separability is abandoned and interactions between consumptions at different dates are taken into account, an interesting relation emerges between risk aversion and length of the planning horizon.Specifically, we show that when consumptions at different dates are specific substitutes, risk aversion increases with horizon length. This may explain the surprising empirical finding that individuals seem to increase the share of wealth held in risky assets as they become older. (JEL: D11, D91, G11) Copyright (c) 2006 by the European Economic Association.
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Volume (Year): 4 (2006)
Issue (Month): 4 (06)
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