Temporal Risk Resolution: Utility versus Probability Weighting Approaches

Mohammed Abdellaoui (), Enrico Diecidue (), Emmanuel Kemel () and Ayse Onculer ()
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Mohammed Abdellaoui: GREGHEC - Groupement de Recherche et d'Etudes en Gestion - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique, HEC Paris - Ecole des Hautes Etudes Commerciales, CNRS - Centre National de la Recherche Scientifique
Enrico Diecidue: INSEAD - Institut Européen d'administration des Affaires
Emmanuel Kemel: GREGHEC - Groupement de Recherche et d'Etudes en Gestion - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique, HEC Paris - Ecole des Hautes Etudes Commerciales, CNRS - Centre National de la Recherche Scientifique
Ayse Onculer: ESSEC Business School

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Abstract: This paper reports two experiments in which attitudes towards temporal risk resolution is elicited from choices between two-outcome lotteries that pay out at some future fixed date and can be resolved either now or later. We show that matching probabilities provides a simple method to measure attitudes towards temporal resolution-via the utility scaleunder Kreps and Porteus' (1978) recursive expected utility. We also analyze our data using a general recursive model that can reveal attitudes towards temporal risk resolution through the utility scale and/or the probability weighting scale. In terms of goodness of fit, as well as of prediction accuracy, our results point to a better performance of the probability weighting approach. More specifically, we show that individuals become less sensitive and more pessimistic with respect to winning probabilities when lotteries are resolved later rather than now.

Keywords: recursive expected utility; preference for early resolution; probability weighting; recursive rank-dependent utility; time preference; risk preference; Temporal resolution of uncertainty; temporal risk (search for similar items in EconPapers)
Date: 2021-08-31
New Economics Papers: this item is included in nep-cwa, nep-isf, nep-rmg and nep-upt
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