Intertemporal Consumption with Risk: A Revealed Preference Analysis

Abstract

We run an experiment to elicit preferences over state-contingent timed payouts. We analyze the data using a new revealed preference method (building on Nishimura, Ok, and Quah (2017)) that can test for consistency with utility functions that increase with a given preorder. We find that correlation neutrality, a property implied by discounted expected utility, is widely violated and there is, instead, strong evidence of intertemporal correlation averse behavior. Our results suggest that utility is not additive across both states and time and that credible models of choice need to allow people to prefer negative correlation in timed payouts.

Computing revealed preference goodness-of-fit measures with integer programming

“…Our techniques can also be modified to accommodate general choice settings with preferences that extend some ex-ante given partial order as in Nishimura, Ok, and Quah [2017]. For example, one might want preferences to satisfy stochastic dominance for data on contingent consumption as in Choi, Fisman, Gale, and Kariv [2007] or preferences that satisfy impatience for payments that arrive at different times as in Lanier, Miao, Quah, and Zhong [2020]. 10 We sketch the result here in more detail.…”

Optimal climate policy under tipping risk and temporal risk aversion

“…Thus, this social diversification strategy is appealing from a normative point of view when facing irreversible catastrophic tipping risks. Also, from a positive point of view, empirical elicitations of individual preferences suggest that individual agents might exhibit positive correlation aversion [24,3,27,45,34].…”