Stochastic Impatience and the Separation of Time and Risk Preferences

We study how the separation of time and risk preferences relates to a behavioral property that generalizes impatience to stochastic environments: Stochastic Impatience. We show that, within a broad class of models, Stochastic Impatience holds if and only if risk aversion is not too high relative to the inverse of the elasticity of intertemporal substitution. In particular, in the models of Epstein and Zin (1989) and Hansen and Sargent (1995), Stochastic Impatience is violated for all commonly used parameters.

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

JEL Classification: D81, D90, G11, E7

Suggested Citation: 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. 20-026, Available at SSRN: https://ssrn.com/abstract=3645071 or http://dx.doi.org/10.2139/ssrn.3645071