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Risk preferences are not time preferences: balancing on a budget line: comment


Epper, Thomas; Fehr-Duda, Helga (2015). Risk preferences are not time preferences: balancing on a budget line: comment. 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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6 citations in Web of Science®
6 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:July 2015
Deposited On:18 Jan 2016 13:06
Last Modified:05 Apr 2016 19:55
Publisher:American Economic Association
ISSN:0002-8282
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.1257/aer.20130420
Related URLs:https://www.aeaweb.org/articles.php?doi=10.1257/aer.20130420 (Publisher)
Other Identification Number:merlin-id:10484

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