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Risk in Time: The Intertwined Nature of Risk Taking and Time Discounting

Epper, Thomas F; Fehr-Duda, Helga (2024). Risk in Time: The Intertwined Nature of Risk Taking and Time Discounting. Journal of the European Economic Association, 22(1):310-354.

Abstract

Standard economic models view risk taking and time discounting as two independent dimensions of decision making. However, mounting experimental evidence demonstrates striking parallels in patterns of risk taking and time discounting behavior and systematic interaction effects, which suggests that there may be common underlying forces driving these interactions. Here, we show that the inherent uncertainty associated with future prospects together with individuals’ proneness to probability weighting generates a unifying framework for explaining a large number of puzzling behavioral findings: delay-dependent risk tolerance, aversion to sequential resolution of uncertainty, preferences for the timing of the resolution of uncertainty, the differential discounting of risky and certain outcomes, hyperbolic discounting, subadditive discounting, and the order dependence of prospect valuation. Furthermore, all these phenomena can be accommodated by the same set of preference parameter values and plausible levels of inherent uncertainty.

Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Finance
Dewey Decimal Classification:330 Economics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:9 February 2024
Deposited On:24 Jan 2024 13:00
Last Modified:30 Oct 2024 02:41
Publisher:Oxford University Press
ISSN:1542-4766
OA Status:Hybrid
Publisher DOI:https://doi.org/10.1093/jeea/jvad041
Other Identification Number:merlin-id:24286
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  • Funder: Aarhus Universitet
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  • Funder: Universität Zürich
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