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Risky Decisions and the Opportunity Costs of Time

Jan Hausfeld and Sven Resnjanskij ()

No 108, TWI Research Paper Series from Thurgauer Wirtschaftsinstitut, Universität Konstanz

Abstract: We investigate the trade-off between the costs of decisions and their quality in a simple model in which a decision maker trades off using time for arriving at a risky decision and for pursuing an alternative activity. When decision time increases the quality of the decision, rational agents consider the opportunity cost of time when deciding how much time to allocate to decision-making. In a lab experiment, we introduce exogenous variation in the opportunity costs of time allocated to making risky decisions by reducing the subjects’ payoffs as decision time increases. Using structural estimations, we infer preferences and decision errors. We find that an increase in the opportunity cost of time reduces, ceteris paribus, decision time, and that reducing the time available for making decisions increases the probability of mistakes. Moreover, we show that using more time when making small-stake decisions does not necessarily indicate irrational behavior, and neither does a positive correlation between decision time and the probability of making mistakes. Such behavior is compatible with our model of rational decision-making.

Keywords: decision under risk; time constraints; opportunity costs; rational behavior; lab experiment; structural estimation (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp and nep-upt
Date: 2017
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