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Intertemporal Utility and Correlation Aversion


  • Steffen Andersen

    () (Copenhagen Business School)

  • Glenn W. Harrison

    () (Robinson College of Business, Georgia State University)

  • Morten Lau

    () (Durham Business School)

  • Elisabet E. Rutstroem

    () (Robinson College of Business, Georgia State University)


Convenient assumptions about qualitative properties of the intertemporal utility function have generated counter-intuitive implications for the relationship between atemporal risk aversion and the intertemporal elasticity of substitution. If the intertemporal utility function is additively separable then the latter two concepts are the inverse of each other. We review a simple theoretical specification with a long lineage in the literature on multi-attribute utility, and demonstrate the critical role of a concept known as intertemporal risk aversion or intertemporal correlation aversion. This concept is the intertemporal analogue of a more general concept applied to two attributes of utility, but where the attributes just happen to be the time-dating of the good. In the context of intertemporal utility functions, the concept provides an intuitive explanation of possible differences between (the inverse of) atemporal risk aversion and the intertemporal elasticity of substitution. We use this theoretical structure to guide the design of a series of experiments that allow us to identify and estimate intertemporal correlation aversion. Our results show that subjects are correlation averse over lotteries with intertemporal income profiles, and that the convenient additive specification of the intertemporal utility function is not an appropriate representation of preferences over time.

Suggested Citation

  • Steffen Andersen & Glenn W. Harrison & Morten Lau & Elisabet E. Rutstroem, 2011. "Intertemporal Utility and Correlation Aversion," Working Papers 2011_03, Durham University Business School.
  • Handle: RePEc:dur:durham:2011_03

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    1. repec:eee:ecofin:v:42:y:2017:i:c:p:156-171 is not listed on IDEAS
    2. Christoph Heinzel, 2014. "Term structure of discount rates under multivariate s-ordered consumption growth," Working Papers SMART - LERECO 14-01, INRA UMR SMART-LERECO.
    3. Filiz-Ozbay, Emel & Guryan, Jonathan & Hyndman, Kyle & Kearney, Melissa & Ozbay, Erkut Y., 2015. "Do lottery payments induce savings behavior? Evidence from the lab," Journal of Public Economics, Elsevier, vol. 126(C), pages 1-24.
    4. Georges Dionne & Jingyuan Li & Cedric Okou, 2012. "An Extension of the Consumption-based CAPM Model," Cahiers de recherche 1214, CIRPEE.
    5. Ubfal, Diego, 2016. "How general are time preferences? Eliciting good-specific discount rates," Journal of Development Economics, Elsevier, vol. 118(C), pages 150-170.
    6. Antoine Bommier & François Grand, 2014. "Too risk averse to purchase insurance?," Journal of Risk and Uncertainty, Springer, vol. 48(2), pages 135-166, April.
    7. Antoine Bommier, 2013. "Life-Cycle Preferences Revisited," Journal of the European Economic Association, European Economic Association, vol. 11(6), pages 1290-1319, December.
    8. Steffen Andersen & James C. Cox & Glenn W. Harrison & Morten Lau & Elisabet E. Rutstroem & Vjollca Sadiraj, 2011. "Asset Integration and Attitudes to Risk: Theory and Evidence," Working Papers 2011_10, Durham University Business School.
    9. Drichoutis, Andreas & Nayga, Rodolfo, 2013. "A reconciliation of time preference elicitation methods," MPRA Paper 46916, University Library of Munich, Germany, revised 12 May 2013.
    10. Cheung, Stephen L., 2015. "Eliciting utility curvature and time preference," Working Papers 2015-01, University of Sydney, School of Economics.
    11. Cheung, Stephen L., 2012. "Risk Preferences Are Not Time Preferences: Comment," IZA Discussion Papers 6762, Institute for the Study of Labor (IZA).
    12. Andreas C. Drichoutis & Rodolfo M. Nayga, Jr., 2015. "Do Risk and Time Preferences Have Biological Roots?," Southern Economic Journal, Southern Economic Association, vol. 82(1), pages 235-256, July.
    13. Mark Schneider, 2016. "Dual Process Utility Theory: A Model of Decisions Under Risk and Over Time," Working Papers 16-23, Chapman University, Economic Science Institute.

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