A Relationship Between Risk and Time Preferences

Kota Saito

No 1477, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: This paper investigates a general relationship between risk and time preferences. I consider a decision maker who chooses between consumption of a particular prize in one period and a different prize in another period. The individual believes that today’s good is certain, and that, as the promised date for a future good becomes increasingly distant, the probability of his consuming the good decreases. Under these assumptions, this paper shows that the individuals exhibits the common ratio effect, the certainty effect, and the expected utility if and only if he discounts hyperbolically, quasi-hyperbolically and exponentially, respectively.

Keywords: Allais paradox; hyperbolic discounting (search for similar items in EconPapers)
JEL-codes: D11 D81 D91 (search for similar items in EconPapers)
Date: 2009-08
New Economics Papers: this item is included in nep-cbe, nep-neu and nep-upt
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Citations: View citations in EconPapers (4)

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