Eliciting Risk and Time Preferences

Authors

  • Steffen Andersen,

    1. Dept. of Economics and Centre for Economic and Business Research, Copenhagen Business School, Copenhagen, Denmark; sa.eco@cbs.dk,
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  • Glenn W. Harrison,

    1. Dept. of Economics, College of Business Administration, University of Central Florida, Orlando, FL 32816, U.S.A. and Durham Business School, Durham University, Durham, U.K.; gharrison@research.bus.ucf.edu,
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  • Morten I. Lau,

    1. Dept. of Economics and Finance, Durham Business School, Durham University, Durham, U.K.; m.i.lau@durham.ac.uk,
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  • E. Elisabet Rutström

    1. Dept. of Economics, College of Business Administration, University of Central Florida, Orlando, FL 32816, U.S.A.; erutstrom@bus.ucf.edu
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    • Harrison and Rutström thank the U.S. National Science Foundation for research support under grants NSF/IIS 9817518, NSF/HSD 0527675, and NSF/SES 0616746. Harrison and Lau thank the Danish Social Science Research Council for research support under project 24-02-0124. We are grateful to Peter Wakker, Nathaniel Wilcox, six anonymous referees, and David Levine for helpful comments. Supporting data and instructions are stored at the ExLab Digital Archive located at http://exlab.bus.ucf.edu.


Abstract

We design experiments to jointly elicit risk and time preferences for the adult Danish population. Since subjects are generally risk averse, we find that joint elicitation provides estimates of discount rates that are significantly lower than those found in previous studies and more in line with what would be considered as a priori reasonable rates. The statistical specification relies on a theoretical framework that involves a latent trade-off between long-run optimization and short-run temptation. Estimation of this specification is undertaken using structural, maximum likelihood methods. Our main results based on exponential discounting are robust to alternative specifications such as hyperbolic discounting. These results have direct implications for attempts to elicit time preferences, as well as debates over the appropriate domain of the utility function when characterizing risk aversion and time consistency.

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