Risk Preferences at Different Time Periods: An Experimental Investigation

Risk Preferences at Different Time Periods: An Experimental Investigation

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Article ID: iaor20115177
Volume: 57
Issue: 5
Start Page Number: 975
End Page Number: 987
Publication Date: May 2011
Journal: Management Science
Authors: , ,
Abstract:

Intertemporal decision making under risk involves two dimensions: time preferences and risk preferences. This paper focuses on the impact of time on risk preferences, independent of the intertemporal trade‐off of outcomes, i.e., time preferences. It reports the results of an experimental study that examines how delayed resolution and payment of risky options influence individual choice. We used a simple experimental design based on the comparison of two‐outcome monetary lotteries with the same delay. Raw data clearly reveal that subjects become more risk tolerant for delayed lotteries. Assuming a prospect theory–like model under risk, we analyze the impact of time on utility and decision weights, independent of time preferences. We show that the subjective treatment of outcomes (i.e., utility) is not significantly affected by time. In fact, the impact of time is completely absorbed by the probability weighting function. The effect of time on risk preferences was found to generate probabilistic optimism resulting in a higher risk tolerance for delayed lotteries.

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