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The Missing Link: Unifying Risk Taking and Time Discounting

Thomas Epper and Fehr-Duda, Helga ()

No 1812, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: Standard economic models view risk taking and time discounting as two independent dimensions of decision makers’ behavior. However, mounting experimental evidence demonstrates the existence of robust and systematic interaction effects. There are striking parallels in patternsof risk taking and time discounting behavior, which suggests that there is a common underlying force driving these interactions. Here we show that decision makers’ anticipationof something going wrong in the future conjointly with their proneness to probability weighting generates a unifying framework for explaining seven puzzling regularities: delay-dependent risk tolerance, aversion to sequential resolution of uncertainty, preferences for resolution timing, hyperbolic discounting, subadditive discounting, the differential discounting of risky and certain outcomes, and the order dependence of prospect valuation. Finally, we discuss the implications of our framework for understanding real-world behavior, such as the coexistence of underinsuring and overinsuring.

Keywords: Risk preferences; time preferences; time-dependent risk tolerance; decreasing impatience; timing and frequency of uncertainty resolution; probability-dependent risk attitudes; over-/under-insurance. (search for similar items in EconPapers)
JEL-codes: D01 D81 D91 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-upt
Date: 2018-11
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