Eliciting Risk and Time Preferences

Econometrica, Forthcoming

University of Central Florida, College of Business Administration, Department of Economics Working Paper No. 05-24

Posted: 7 Jan 2008

See all articles by Steffen Andersen

Steffen Andersen

Copenhagen Business School - Department of Finance; CEPR

Glenn W. Harrison

Georgia State University - J. Mack Robinson College of Business

Morten I. Lau

Durham Business School

E. Elisabet Rutström

University of Central Florida - College of Business Administration

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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.

Keywords: Field experiments, discount rates, risk aversion

JEL Classification: C93, D81, D91

Suggested Citation

Andersen, Steffen and Harrison, Glenn William and Lau, Morten Igel and Rutstrom, Elisabet, Eliciting Risk and Time Preferences. Econometrica, Forthcoming, University of Central Florida, College of Business Administration, Department of Economics Working Paper No. 05-24, Available at SSRN: https://ssrn.com/abstract=1081252

Steffen Andersen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

CEPR ( email )

London
United Kingdom

Glenn William Harrison

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States
407-489-3088 (Phone)
253-830-7636 (Fax)

HOME PAGE: http://www.cear.gsu.edu/

Morten Igel Lau

Durham Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Elisabet Rutstrom

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

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