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Uncertainty Breeds Decreasing Impatience: The Role of Risk Preferences in Time Discounting


Thomas F. Epper


Chair of Economics, ETH Zurich; University of Zurich - Department of Economics

Helga Fehr-Duda


ETH Zürich - Center for Economic Research

Adrian Bruhin


ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

May 18, 2009

University of Zurich, Institute for Empirical Research in Economics Working Paper No. 412

Abstract:     
Future events are uncertain by their very nature. Therefore, people's risk preferences are likely to play a role in the valuation of allegedly guaranteed future outcomes. We show that future uncertainty conjointly with people's proneness to nonlinear probability weighting generates a unifying framework for explaining many anomalies in intertemporal choice, such as hyperbolic discounting and subadditivity of discount factors. Moreover, our approach implies that higher uncertainty of future prospects increases the hyperbolicity of discount rates, suggesting that institutional deficiencies such as lack of contract enforcement, may be a source of hyperbolic discounting behavior. Based on an experiment with monetary incentives, we show that people's risk taking behavior is indeed a significant determinant of their time discounting behavior: Greater departures from linear probability weighting predict a stronger decline in impatience on the level of individual behavior.

Number of Pages in PDF File: 43

Keywords: institutionally generated uncertainty, time preferences, risk preferences, hyperbolic discounting, probability weighting

JEL Classification: D01, D81, D91

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Date posted: June 9, 2009  

Suggested Citation

Epper, Thomas F. and Fehr-Duda, Helga and Bruhin, Adrian, Uncertainty Breeds Decreasing Impatience: The Role of Risk Preferences in Time Discounting (May 18, 2009). University of Zurich, Institute for Empirical Research in Economics Working Paper No. 412. Available at SSRN: http://ssrn.com/abstract=1416007 or http://dx.doi.org/10.2139/ssrn.1416007

Contact Information

Thomas F. Epper (Contact Author)
Chair of Economics, ETH Zurich ( email )
Weinbergstrasse 35
WEH
Zurich, 8092
Switzerland
HOME PAGE: http://www.econ.ethz.ch/people/tepper
University of Zurich - Department of Economics ( email )
Winterhturerstr. 30
Zuerich, 8006
Switzerland
Helga Fehr-Duda
Swiss Federal Institute of Technology Zurich - Center for Economic Research ( email )
Weinbergstr. 35
Zurich 8092
Switzerland
Adrian Bruhin
Swiss Federal Institute of Technology Zurich - CER-ETH - Center of Economic Research at ETH Zurich ( email )
Zürichbergstrasse 18
Zurich, 8092
Switzerland
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