Risk and Reward Preferences Under Time Pressure
Review of Finance doi:10.1093/rof/rft013
Posted: 29 Aug 2016 Last revised: 1 Mar 2017
Date Written: January 31, 2011
Financial decision making under time pressure, though ubiquitous, is poorly understood; classical and behavioral finance are silent about the time required for a decision to be made. In an experiment, calibrating allowable decision times to 1, 3, and 5 s, we find that classical moment-based preferences reflect time-invariant sensitivity to expected reward, purchase impulsiveness under extreme time pressure, and decreased aversion to variance and increased aversion to skewness with decision time. These time varying sensitivities translate into increased probability distortions and decreased risk aversion for gains under prospect theory (PT). Strikingly, moment-based theory provides a better fit than PT.
JEL Classification: C91, D81
Suggested Citation: Suggested Citation