Risk Preferences at Different Time Periods: An Experimental Investigation

Mohammed Abdellaoui, Enrico Diecidue and Ayse Öncüler
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Enrico Diecidue: INSEAD - Institut Européen d'administration des Affaires
Ayse Öncüler: ESSEC Business School

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Abstract: Intertemporal decision making under risk involves two dimensions: time preferences and risk preferences. This paper focuses on the impact of time on risk preferences, independent of the intertemporal trade-off of outcomes, i.e., time preferences. It reports the results of an experimental study that examines how delayed resolution and payment of risky options influence individual choice. We used a simple experimental design based on the comparison of two-outcome monetary lotteries with the same delay. Raw data clearly reveal that subjects become more risk tolerant for delayed lotteries. Assuming a prospect theory-like model under risk, we analyze the impact of time on utility and decision weights, independent of time preferences. We show that the subjective treatment of outcomes (i.e., utility) is not significantly affected by time. In fact, the impact of time is completely absorbed by the probability weighting function. The effect of time on risk preferences was found to generate probabilistic optimism resulting in a higher risk tolerance for delayed lotteries.

Keywords: time preferences; risk preferences; delayed lotteries; attitude toward risk; utility; decision weights; optimism; sensitivity to probabilities (search for similar items in EconPapers)
Date: 2011-05
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Citations: View citations in EconPapers (29)

Published in Management Science, 2011, 57 (5), pp.975-987. ⟨10.1287/mnsc.1110.1324⟩

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Journal Article: Risk Preferences at Different Time Periods: An Experimental Investigation (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00609217

DOI: 10.1287/mnsc.1110.1324

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