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Comment on "risk preferences are not time preferences": balancing on a budget line


Epper, Thomas; Fehr-Duda, Helga (2015). Comment on "risk preferences are not time preferences": balancing on a budget line. American Economic Review, 105(7):2261-2271.

Abstract

In a recent experimental study of intertemporal risky decision making, Andreoni and Sprenger (2012) find that subjects exhibit a preference for intertemporal diversification, which is inconsistent with discounted expected utility theory. It was claimed that their results are also at odds with models involving probability weighting, such as rank-dependent utility and cumulative prospect theory. Here we demonstrate, however, that rank-dependent probability weighting explains intertemporal diversification if decision makers care about portfolio risk. Moreover, we provide a unified account of all of Andreoni and Sprenger's key findings.

Abstract

In a recent experimental study of intertemporal risky decision making, Andreoni and Sprenger (2012) find that subjects exhibit a preference for intertemporal diversification, which is inconsistent with discounted expected utility theory. It was claimed that their results are also at odds with models involving probability weighting, such as rank-dependent utility and cumulative prospect theory. Here we demonstrate, however, that rank-dependent probability weighting explains intertemporal diversification if decision makers care about portfolio risk. Moreover, we provide a unified account of all of Andreoni and Sprenger's key findings.

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Additional indexing

Other titles:Balancing on a budget line : comment on Andreoni and Sprenger's 'Risk preferences are not time preferences'
Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:Risk, decision making, utility theory, portfolio management, investments, behavioral research, prospect theory
Language:English
Date:July 2015
Deposited On:06 Nov 2015 15:27
Last Modified:21 Nov 2017 20:03
Publisher:American Economic Association
ISSN:0002-8282
Publisher DOI:https://doi.org/10.1257/aer.20130420

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