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Stochastic Impatience and the Separation of Time and Risk Preferences

Author

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  • David Dillenberger

    (Department of Economics, University of Pennsylvania)

  • Daniel Gottlieb

    (Department of Economics, Washington University in St. Louis)

  • Pietro Ortoleva

    (Department of Economics, Princeton University)

Abstract

We study how the separation between time and risk preferences relates to a new behavioral property that generalizes impatience to stochastic environments: Stochastic Impatience. We show that Stochastic Impatience holds if and only if risk aversion is \not too high" relative to the inverse elasticity of intertemporal substitution. This result has implications for many known models. For example, in the models of Epstein and Zin (1989) and Hansen and Sargent (1995), Stochastic Impatience is violated for all commonly used parameters. If Stochastic Impatience is taken normatively, this suggests a limit on the amount of separation between time and risk preference; otherwise, it provides a simple one-question test for it.

Suggested Citation

  • David Dillenberger & Daniel Gottlieb & Pietro Ortoleva, 2018. "Stochastic Impatience and the Separation of Time and Risk Preferences," PIER Working Paper Archive 18-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 08 Sep 2018.
    • Handle: RePEc:pen:papers:18-020
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    Cited by:

    1. Lorenzo Maria Stanca, 2023. "Recursive Preferences, Correlation Aversion, and the Temporal Resolution of Uncertainty," Papers 2304.04599, arXiv.org, revised Jul 2023.
    2. Svetlana Pashchenko & Ponpoje Porapakkarm, 2022. "Value of life and annuity demand," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(2), pages 371-396, June.
    3. Patrick DeJarnette & David Dillenberger & Daniel Gottlieb & Pietro Ortoleva, 2020. "Time Lotteries and Stochastic Impatience," Econometrica, Econometric Society, vol. 88(2), pages 619-656, March.
    4. Stanca Lorenzo, 2023. "Recursive preferences, correlation aversion, and the temporal resolution of uncertainty," Working papers 080, Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    5. Minghao Pan, 2022. "Risk and Intertemporal Preferences over Time Lotteries," Papers 2209.01790, arXiv.org.
    6. Al-Najjar, Nabil I. & Pomatto, Luciano, 2020. "Aggregate risk and the Pareto principle," Journal of Economic Theory, Elsevier, vol. 189(C).
    7. Lorenzo Stanca, 2023. "Recursive Preferences, Correlation Aversion, and the Temporal Resolution of Uncertainty," Carlo Alberto Notebooks 693 JEL Classification: C, Collegio Carlo Alberto.
    8. Mu Zhang, 2021. "A Theory of Choice Bracketing under Risk," Papers 2102.07286, arXiv.org, revised Aug 2021.

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    More about this item

    Keywords

    Stochastic Impatience; Epstein and Zin preferences; Separation of Risk and Time preferences; Risk Sensitive Preferences; Non-Expected Utility;
    All these keywords.

    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
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics

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