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Stochastic impatience and the separation of time and risk preferences

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  • Dillenberger, David
  • Gottlieb, Daniel
  • Ortoleva, Pietro

Abstract

We study how the separation of time and risk preferences relates to a property called Stochastic Impatience. We show that, within a broad class of models, Stochastic Impatience holds if and only if risk aversion and the inverse elasticity of intertemporal substitution are sufficiently close. In the models of Epstein and Zin (1989) and Hansen and Sargent (1995), Stochastic Impatience is violated for commonly used parameters. Our result also provides a simple, one-question test for the separation of time and risk preferences.

Suggested Citation

  • Dillenberger, David & Gottlieb, Daniel & Ortoleva, Pietro, 2025. "Stochastic impatience and the separation of time and risk preferences," LSE Research Online Documents on Economics 125994, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:125994
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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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