American Economic Review Vol. 105 No. 7 2015

Comment on “Risk Preferences Are Not Time Preferences”: Balancing on a Budget Line

Thomas Epper¹; Helga Fehr-Duda²

¹ University of St. Gallen, School of Economics and Political Science, Varnbuelstrasse 19, 9000 St. Gallen, Switzerland, and University of Zurich (e-mail: ) · ² University of Zurich, Department of Banking and Finance, Plattenstrasse 32, 8032 Zurich, Switzerland (e-mail: )

Abstract

In a recent experimental study of intertemporal risky decision making, Andreoni and Sprenger (2012) find that subjects exhibit a preference for intertemporal diversification, which is inconsistent with discounted expected utility theory. It was claimed that their results are also at odds with models involving probability weighting, such as rank-dependent utility and cumulative prospect theory. Here we demonstrate, however, that rank-dependent probability weighting explains intertemporal diversification if decision makers care about portfolio risk. Moreover, we provide a unified account of all of Andreoni and Sprenger's key findings.

DOI

10.1257/aer.20130420

Volume

105

Issue

7

Pages

2261-2271

Language

en

Sources

openalex crossref bibtex:phds-export.bib

Cite

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