Risk aversion and the subjective time discount rate : a joint approach

Bernard M. S. van Praag; Adam S. Booij

In this paper we analyze a large sample of individual responses to six lottery questions. Wederive a simultaneous estimate of risk aversion ? and the time preference discount rate ? perindividual. This can be done because the consumption of a large prize is smoothed over a largertime period. It is found that ? and ? strongly vary over individuals, while they are negativelycorrelated with a correlation coefficient of -.3. Furthermore we explain ? and ? by income,age, gender, entrepreneurship and an obesity index. Very significant effects are found. If weexplain ? in a simple model where time discounting is ignored, we find completely differentestimates for ? . We conclude that in the case of lotteries with big prizes a simultaneous estimateof ? and ? is needed in order to avoid misspecification.

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Year of publication:	2003
Authors:	Praag, Bernard M. S. van ; Booij, Adam S.
Publisher:	Rotterdam [u.a.] : Tinbergen Inst.
Subject:	Expected Utility \| Risk Aversion \| Time Preference \| Lotteries \| Hypothetical Questions \| Intertemporale Entscheidung \| Intertemporal choice \| Erwartungsnutzen \| Expected utility \| Risikoaversion \| Risk aversion \| Glücksspiel \| Gambling \| Theorie \| Theory \| Experiment \| Niederlande \| Netherlands