On the interaction of risk and time preferences: An experimental study
Experimental studies of risk and time-preference typically focus on one of the two phenomena. The goal of this paper is to investigate the (possible) correlation between subjects' attitude to risk and their time-preference. For this sake we ask 61 subjects to price a simple lottery in 3 different scenarios. At the first, the lottery premium is paid now. At the second, it is paid later. At the third, it is paid even later. By comparing the certainty equivalents offered by the subjects for the three lotteries, we test how time and risk preferences are interrelated. Since the time interval between now and later is the same as between later and even later, we also test the hypothesis of hyperbolic discounting. The main result is a statistically significant negative correlation between subjects' degrees of risk aversion and their (implicit) discount factors.
|Date of creation:||1999|
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- Drazen Prelec & George Loewenstein, 1991. "Decision Making Over Time and Under Uncertainty: A Common Approach," Management Science, INFORMS, vol. 37(7), pages 770-786, July.
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- George Loewenstein & Drazen Prelec, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 573-597.
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