Risk in Time: The Intertwined Nature of Risk Taking and Time Discounting

Thomas Epper () and Helga Fehr-Duda
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Thomas Epper: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique
Helga Fehr-Duda: UZH - Universität Zürich [Zürich] = University of Zurich

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Abstract: Standard economic models view risk taking and time discounting as two independent dimensions of decision making. However, mounting experimental evidence demonstrates striking parallels in patterns of risk taking and time discounting behavior and systematic interaction effects, which suggests that there may be common underlying forces driving these interactions. Here, we show that the inherent uncertainty associated with future prospects together with individuals' proneness to probability weighting generates a unifying framework for explaining a large number of puzzling behavioral findings: delay-dependent risk tolerance, aversion to sequential resolution of uncertainty, preferences for the timing of the resolution of uncertainty, the differential discounting of risky and certain outcomes, hyperbolic discounting, subadditive discounting, and the order dependence of prospect valuation. Furthermore, all these phenomena can be accommodated by the same set of preference parameter values and plausible levels of inherent uncertainty.

Date: 2024-02-09
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Published in Journal of the European Economic Association, 2024, 22 (1), pp.310-354. ⟨10.1093/jeea/jvad041⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04543916

DOI: 10.1093/jeea/jvad041

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