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Stochastic Impatience and the Separation of Time and Risk Preferences

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Listed:
  • David Dillenberger

    (University of Pennsylvania)

  • Daniel Gottlieb

    (London School of Economics)

  • Pietro Ortoleva

    (Princeton University)

Abstract

We study how the separation of time and risk preferences relates to a behavioral property that generalizes impatience to stochastic environments: Stochastic Impatience. We show that, within a broad class of models, Stochastic Impatience holds if and only if risk aversion is "not too high" relative to the inverse elasticity of intertemporal substitution. This result has implications for many known models. For example, for those of Epstein and Zin (1989) and Hansen and Sargent (1995), Stochastic Impatience is violated for all commonly used parameters.

Suggested Citation

  • David Dillenberger & Daniel Gottlieb & Pietro Ortoleva, 2020. "Stochastic Impatience and the Separation of Time and Risk Preferences," Working Papers 2020-54, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2020-54
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    Cited by:

    1. Lorenzo Maria Stanca, 2023. "Recursive Preferences, Correlation Aversion, and the Temporal Resolution of Uncertainty," Papers 2304.04599, arXiv.org, revised Jul 2023.
    2. Svetlana Pashchenko & Ponpoje Porapakkarm, 2022. "Value of life and annuity demand," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(2), pages 371-396, June.
    3. Patrick DeJarnette & David Dillenberger & Daniel Gottlieb & Pietro Ortoleva, 2020. "Time Lotteries and Stochastic Impatience," Econometrica, Econometric Society, vol. 88(2), pages 619-656, March.
    4. Stanca Lorenzo, 2023. "Recursive preferences, correlation aversion, and the temporal resolution of uncertainty," Working papers 080, Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    5. Minghao Pan, 2022. "Risk and Intertemporal Preferences over Time Lotteries," Papers 2209.01790, arXiv.org.
    6. Al-Najjar, Nabil I. & Pomatto, Luciano, 2020. "Aggregate risk and the Pareto principle," Journal of Economic Theory, Elsevier, vol. 189(C).
    7. Lorenzo Stanca, 2023. "Recursive Preferences, Correlation Aversion, and the Temporal Resolution of Uncertainty," Carlo Alberto Notebooks 693 JEL Classification: C, Collegio Carlo Alberto.
    8. Mu Zhang, 2021. "A Theory of Choice Bracketing under Risk," Papers 2102.07286, arXiv.org, revised Aug 2021.

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    More about this item

    Keywords

    Stochastic Impatience; Epstein-Zin preferences; Separation of Time and Risk preferences; Risk Sensitive preferences; Non-Expected Utility;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics

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