Prudent Discounting: Experimental Evidence on Higher-Order Time Risk Preferences

86 Pages Posted: 15 Nov 2018

See all articles by Sebastian Ebert

Sebastian Ebert

Frankfurt School of Finance & Management gemeinnützige GmbH

Date Written: November 2, 2018

Abstract

We report results from an experiment that contrasts preferences toward the risk of what may happen (outcome risk preferences) with preferences toward the risk of when something may happen (time or delay risk preferences). Just as choices over monetary risks identify utility independently from discounting, choices over uncertain delays of a fixed reward identify discounting independently from utility. We replicate the widespread finding of outcome risk aversion, but — in a perfectly symmetric design — find substantial heterogeneity in delay risk aversion. Going beyond the second order of risk aversion, on the other hand, yields pervasive evidence for delay prudence and outcome prudence alike. This first empirical support for prudent discounting speaks to recent theoretical arguments that prudence may be a more important trait than previously realized.

Keywords: discounting, higher-order risk preferences, prudence, temperance

JEL Classification: D81, D90

Suggested Citation

Ebert, Sebastian, Prudent Discounting: Experimental Evidence on Higher-Order Time Risk Preferences (November 2, 2018). Available at SSRN: https://ssrn.com/abstract=3277316 or http://dx.doi.org/10.2139/ssrn.3277316

Sebastian Ebert (Contact Author)

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

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