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Time Lotteries and Stochastic Impatience

Patrick DeJarnette (), David Dillenberger (), Daniel Gottlieb () and Pietro Ortoleva
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Patrick DeJarnette: Department of Economics, National Taiwan University
David Dillenberger: Department of Economics, University of Pennsylvania
Daniel Gottlieb: Department of Economics, Washington University in St. Louis

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We study preferences over lotteries that pay a xed prize at an uncertain future date: what we call time lotteries. The standard model of risk and time preferences, Expected Discounted Utility, implies that individuals must be risk seeking towards such lotteries (RSTL). In contrast, we show experimentally that almost all subjects violate this property. Our main contributions are theoretical. First, we show that risk aversion over time lotteries can be captured by a generalization of Expected Discounted Utility that is obtained by keeping the behavioral postulates of Discounted Utility and Expected Utility. Second, we introduce a new property termed Stochastic Impatience, a risky counterpart of standard Impatience, and show that not only the model above, but also substantial generalizations that allow for non-Expected Utility and non-exponential discounting, cannot jointly accommodate it and even a single instance of risk aversion over time lotteries (or, equivalently, any violation of RSTL), showing a fundamental tension between the two.

Keywords: Expected Discounted Utility; Separation of Risk and Time preferences; Time Lotteries; Stochastic Impatience (search for similar items in EconPapers)
JEL-codes: C91 D81 D90 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2014-10-07, Revised 2018-06-13
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