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The missing link: unifying risk taking and time discounting


Epper, Thomas; Fehr-Duda, Helga (2018). The missing link: unifying risk taking and time discounting. Working paper series / Department of Economics 96, University of Zurich.

Abstract

Standard economic models view risk taking and time discounting as two independent dimensions of decision makers' behavior. However, mounting experimental evidence demonstrates the existence of robust and systematic interaction effects. There are striking parallels in patterns of risk taking and time discounting behavior, which suggests that there is a common underlying force driving these interactions. Here we show that decision makers' anticipation of something going wrong in the future conjointly with their proneness to probability weighting generates a unifying framework for explaining seven puzzling regularities: delay-dependent risk tolerance, aversion to sequential resolution of uncertainty, preferences for resolution timing, hyperbolic discounting, subadditive discounting, the differential discounting of risky and certain outcomes, and the order dependence of prospect valuation. Finally, we discuss the implications of our framework for understanding real-world behavior, such as the coexistence of underinsuring and overinsuring.

Abstract

Standard economic models view risk taking and time discounting as two independent dimensions of decision makers' behavior. However, mounting experimental evidence demonstrates the existence of robust and systematic interaction effects. There are striking parallels in patterns of risk taking and time discounting behavior, which suggests that there is a common underlying force driving these interactions. Here we show that decision makers' anticipation of something going wrong in the future conjointly with their proneness to probability weighting generates a unifying framework for explaining seven puzzling regularities: delay-dependent risk tolerance, aversion to sequential resolution of uncertainty, preferences for resolution timing, hyperbolic discounting, subadditive discounting, the differential discounting of risky and certain outcomes, and the order dependence of prospect valuation. Finally, we discuss the implications of our framework for understanding real-world behavior, such as the coexistence of underinsuring and overinsuring.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D01, D81, D91
Uncontrolled Keywords:Risk taking, time discounting, probability weighting, decreasing impatience, increasing risk tolerance, preference for late resolution of uncertainty, preference for one-shot resolution of uncertainty, Risiko, Risikobereitschaft, Entscheidung bei Risiko, Entscheidungsfindung, Zeitpräferenz
Language:English
Date:October 2018
Deposited On:13 Nov 2012 16:38
Last Modified:19 Aug 2020 10:09
Series Name:Working paper series / Department of Economics
Number of Pages:68
ISSN:1664-7041
Additional Information:Revised version
OA Status:Green
Official URL:http://www.econ.uzh.ch/static/workingpapers.php?id=774

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Language: English
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