Stochastic Impatience and the Separation of Time and Risk Preferences

40 Pages Posted: 20 Sep 2018 Last revised: 12 Aug 2021

See all articles by David Dillenberger

David Dillenberger

University of Pennsylvania - Department of Economics

Daniel Gottlieb

Washington University in St. Louis

Pietro Ortoleva

Princeton University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 5, 2020

Abstract

We study how the separation between time and risk preferences relates to a new behavioral property that generalizes impatience to stochastic environments: Stochastic Impatience. We show that Stochastic Impatience holds if and only if risk aversion is \not too high" relative to the inverse elasticity of intertemporal substitution. This result has implications for many known models. For example, in the models of Epstein and Zin (1989) and Hansen and Sargent (1995), Stochastic Impatience is violated for all commonly used parameters. If Stochastic Impatience is taken normatively, this suggests a limit on the amount of separation between time and risk preference; otherwise, it provides a simple one-question test for it.

Keywords: Stochastic Impatience, Epstein and Zin preferences, Separation of Risk and Time preferences, Risk Sensitive Preferences, Non-Expected Utility

JEL Classification: D81, D90, G11, E7

Suggested Citation

Dillenberger, David and Gottlieb, Daniel and Ortoleva, Pietro, Stochastic Impatience and the Separation of Time and Risk Preferences (July 5, 2020). PIER Working Paper No. 18-020, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=3252503 or http://dx.doi.org/10.2139/ssrn.3252503

David Dillenberger (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-1503 (Phone)

Daniel Gottlieb

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
St. Louis, MO MO 63130
United States

Pietro Ortoleva

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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