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Risk Preferences Are Not Time Preferences: Discounted Expected Utility with a Disproportionate Preference for Certainty

  • James Andreoni
  • Charles Sprenger

Risk and time are intertwined. The present is known while the future is inherently risky. Discounted expected utility provides a simple, coherent structure for analyzing decisions in intertemporal, uncertain environments. However, we document robust violations of discounted expected utility, inconsistent with both prospect theory probability weighting and models with preferences for the resolution of uncertainty. We find that we can organize our data with surprising precision if we allow for a disproportionate preference for certainty. These results have potentially important implications for understanding dynamically inconsistent preferences.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16348.

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Date of creation: Sep 2010
Date of revision:
Publication status: published as “Risk Preferences are Not Time Preferences.” with Charles Sprenger, American Economic Review , December 2012, 102 (7), 3357-3376.
Handle: RePEc:nbr:nberwo:16348
Note: PE
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  1. Maribeth Coller & Melonie Williams, 1999. "Eliciting Individual Discount Rates," Experimental Economics, Springer, vol. 2(2), pages 107-127, December.
  2. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  3. George Wu & John List & Uri Gneezy, 2006. "The uncertainty effect: When a risky prospect is valued less than its worst possible outcome," Framed Field Experiments 00152, The Field Experiments Website.
  4. Neilson, William S., 1992. "Some mixed results on boundary effects," Economics Letters, Elsevier, vol. 39(3), pages 275-278, July.
  5. Halevy, Yoram, 2004. "Strotz meets Allais: Diminishing Impatience and the Certainty Effect," working papers yoram_halevy-2004-16, Vancouver School of Economics, revised 25 Feb 2014.
  6. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
  7. Enrico Diecidue & Ulrich Schmidt & Peter P. Wakker, 2004. "The Utility of Gambling Reconsidered," Journal of Risk and Uncertainty, Springer, vol. 29(3), pages 241-259, December.
  8. Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Eliciting Risk and Time Preferences," Econometrica, Econometric Society, vol. 76(3), pages 583-618, 05.
  9. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-89, November.
  10. Manel Baucells & Franz Heukamp, 2010. "Common ratio using delay," Theory and Decision, Springer, vol. 68(1), pages 149-158, February.
  11. Schoemaker, Paul J H, 1982. "The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 529-63, June.
  12. Machina, Mark J., 1984. "Temporal risk and the nature of induced preferences," Journal of Economic Theory, Elsevier, vol. 33(2), pages 199-231, August.
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