Risk Aversion and the Subjective Time Discount Rate: A Joint Approach

Arbeitspapier

In this paper we analyze a large sample of individual responses to six lottery questions. We derive a simultaneous estimate of risk aversion and the time preference discount rate per individual. This can be done because the consumption of a large prize is smoothed over a larger time period. It is found that both parameters strongly vary over individuals, while they are moderately negatively correlated. Furthermore we explain the estimated relative risk aversion and time preference by income, age, gender, entrepreneurship and an obesity index. Very significant effects are found. If we explain relative risk aversion in a simple model where time discounting is ignored, we find completely different estimates for this parameter. We conclude that in the case of lotteries with big prizes a simultaneous estimate of risk aversion and time preference is needed in order to avoid misspecification

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 923

Classification and Topics

• Classification: Wirtschaft ; Consumer Economics: Empirical Analysis ; Information, Knowledge, and Uncertainty: General ; Micro-Based Behavioral Economics: General‡ ; Macroeconomics: Consumption; Saving; Wealth
• Subject: expected utility ; risk aversion ; time preference ; lotteries ; hypothetical questions

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): van Praag, Bernard M.S. ; Booij, Adam S.
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2003

Further information

• Handle: http://hdl.handle.net/10419/76434
• Last update: 10.03.2025, 11:42 AM CET