Affiliation:
1. CNRS, IESEG School of Management, Univ. Lille, UMR 9221-LEM—Lille Economie Management ; and iRisk Research Center on Risk and Uncertainty, France
2. Department of Banking and Finance, University of Zurich , Switzerland
Abstract
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.
Publisher
Oxford University Press (OUP)
Subject
General Economics, Econometrics and Finance
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1 articles.
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