Temporal Risk: Utility vs. Probability Weighting

Mohammed Abdellaoui (), Enrico Diecidue (), Emmanuel Kemel () and Ayse Onculer ()
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Mohammed Abdellaoui: Department of Economics and Decision Sciences, HEC Paris and CNRS, 78351 Jouy en Josas, France
Enrico Diecidue: Department of Decision Sciences, INSEAD, 77305 Fontainebleau Cedex, France
Emmanuel Kemel: Department of Economics and Decision Sciences, HEC Paris and CNRS, 78351 Jouy en Josas, France
Ayse Onculer: Department of Marketing, ESSEC Business School, 92500 Cergy, France

Management Science, 2022, vol. 68, issue 7, 5162-5186

Abstract: This paper reports two experiments in which attitudes toward 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 toward temporal resolution—via the utility scale—under the recursive expected utility of Kreps and Porteus. We also analyze our data using a general recursive model that can reveal attitudes toward 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: temporal resolution of uncertainty; temporal risk; recursive expected utility; preference for early resolution; probability weighting; recursive rank-dependent utility; time preference; risk preference (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:7:p:5162-5186

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