Separation of Intertemporal Substitution and Time Preference Rate From Risk Aversion: Experimental Analysis With Reward Designs

Ryoko Wada and Sobei H. Oda
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Ryoko Wada: Keiai University
Sobei H. Oda: Kyoto Sangyo University

A chapter in Developments on Experimental Economics, 2007, pp 131-136 from Springer

Abstract: Abstract In the standard intertemporal specification of expected utility (1) $$ U_t = (1 - \beta )E\left[ {\sum\limits_{t = 0}^\infty {\frac{{c_t^{1 - \sigma } }} {{1 - \sigma }}} \beta ^t } \right],$$ the coefficient of relative risk aversion σ is the reciprocal of the rate of intertemporal substitution 1/σ. This has been suspected as a source of poor performance of the standard stochastic consumption model and the risk-premium puzzle in asset pricing 1. More generally, the problematic feature of expected utility applied to intertemporal settings is that its treatment of ‘gambling over time’ cannot distinguish risk aversion and intertemporal substitution 2.

Keywords: Risk Aversion; Asset Return; Relative Risk Aversion; Equity Premium; Consistent Choice (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnechp:978-3-540-68660-6_9

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DOI: 10.1007/978-3-540-68660-6_9

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