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

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.

Eliciting utility curvature in time preference

“…One interpretation is that utility under risk may be more concave than under certainty. However, since the design involves an interaction of risk and time, the interpretation of this result is open to debate(Harrison et al 2013;Cheung 2015;Epper and Fehr- Duda 2015;Schmidt 2014).…”

Measuring Time Preferences

“…For instance, Epper and Fehr-Duda (2015) argue that rank dependent probability weighting in which participants care about their whole portfolio's risk can explain the results (however, see Dean and Ortoleva 2015). Miao and role of arbitrage in producing results that look like linear utility and non-present-biased RRRs.…”

Measuring Discounting without Measuring Utility

“…When introducing discounted utility, Samuelson (1937, last paragraph) immediately warned that cardinal intertemporal utility may differ from other kinds of cardinal utility. To avoid these two difficulties, some studies elicited both utility and discounting from intertemporal choices (Abdellaoui, Attema, and Bleichrodt 2010;Andreoni and Sprenger 2012a,b;Epper and Fehr-Duda 2015). Such elicitations are complex and susceptible to collinearities between utility and discounting.…”