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

Author

Listed:
  • Bernard M.S. van Praag

    (University of Amsterdam)

  • Adam S. Booij

    (University of Amsterdam)

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.

Suggested Citation

  • Bernard M.S. van Praag & Adam S. Booij, 2003. "Risk Aversion and the Subjective Time Discount Rate: A Joint Approach," Tinbergen Institute Discussion Papers 03-018/3, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20030018
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    More about this item

    Keywords

    Expected Utility; Risk Aversion; Time Preference; Lotteries; Hypothetical Questions.;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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