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Risk aversion and planning horizons


Rochet, Jean-Charles; Bommier, Antoine (2006). Risk aversion and planning horizons. Journal of the European Economic Association, 4(4):708-734.

Abstract

A number of empirical studies seem to reject the additive separability of preferences that is assumed in most theoretical models of the life cycle. We show that, when additive separability is abandoned and interactions between consumptions at different dates are taken into account, an interesting relation emerges between risk aversion and length of the planning horizon. Specifically, we show that when consumptions at different dates are specific substitutes, risk aversion increases with horizon length. This may explain the surprising empirical finding that individuals seem to increase the share of wealth held in risky assets as they become older. (JEL: D11, D91, G11)

Abstract

A number of empirical studies seem to reject the additive separability of preferences that is assumed in most theoretical models of the life cycle. We show that, when additive separability is abandoned and interactions between consumptions at different dates are taken into account, an interesting relation emerges between risk aversion and length of the planning horizon. Specifically, we show that when consumptions at different dates are specific substitutes, risk aversion increases with horizon length. This may explain the surprising empirical finding that individuals seem to increase the share of wealth held in risky assets as they become older. (JEL: D11, D91, G11)

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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:2006
Deposited On:22 May 2012 07:43
Last Modified:05 Apr 2016 15:20
Publisher:Wiley-Blackwell
ISSN:1542-4766
Publisher DOI:https://doi.org/10.1162/JEEA.2006.4.4.708
Other Identification Number:merlin-id:3546

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