Working Paper: NBER ID: w16348
Authors: James Andreoni; Charles Sprenger
Abstract: Risk and time are intertwined. The present is known while the future is inherently risky. Discounted expected utility provides a simple, coherent structure for analyzing decisions in intertemporal, uncertain environments. However, we document robust violations of discounted expected utility, inconsistent with both prospect theory probability weighting and models with preferences for the resolution of uncertainty. We find that we can organize our data with surprising precision if we allow for a disproportionate preference for certainty. These results have potentially important implications for understanding dynamically inconsistent preferences.
Keywords: Risk Preferences; Time Preferences; Discounted Expected Utility; Behavioral Economics
JEL Codes: D81; D90
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk preferences (D81) | preference for certainty (D81) |
| preference for certainty (D81) | intertemporal decision-making (D15) |
| violations of DEU model (C52) | preference for certainty (D81) |
| preference for certainty (D81) | present bias (D15) |
| aggregate discounting rate (E43) | intertemporal decision-making (D15) |