Risk Aversion and the Subjective Time Discount Rate: A Joint Approach

Bernard van Praag and Adam S. Booij ()
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Adam S. Booij: University of Amsterdam

No 03-018/3, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This discussion paper led to a publication in the 'Journal of Economic Behavior & Organization' , 2009, 70(1-2), 374-388.

In this paper we analyze a large sample of individual responses to six lottery questions. Wederive a simultaneous estimate of risk aversion γ and the time preference discount rate ρ perindividual. This can be done because the consumption of a large prize is smoothed over a largertime period. It is found that ρ and γ strongly vary over individuals, while they are negativelycorrelated with a correlation coefficient of -.3. Furthermore we explain γ and ρ by income,age, gender, entrepreneurship and an obesity index. Very significant effects are found. If weexplain γ in a simple model where time discounting is ignored, we find completely differentestimates for γ . We conclude that in the case of lotteries with big prizes a simultaneous estimateof γ and ρ is needed in order to avoid misspecification.

Keywords: Expected Utility; Risk Aversion; Time Preference; Lotteries; Hypothetical Questions. (search for similar items in EconPapers)
JEL-codes: D12 D80 D90 E21 (search for similar items in EconPapers)
Date: 2003-03-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Risk Aversion and the Subjective Time Discount Rate: A Joint Approach (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20030018

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