CeDEx Seminar - Mohammed Abdellaoui (HEC Paris)

Take your Chance or Take your Time: On the Impact of Risk on Time Discounting

Abstract: We report the results of an experimental investigation using a novel elicitation method for discounting that explicitly recognizes the uncertain nature of future outcomes. By trading off the probability of obtaining a prize now against a time delay, this method allows us to access the discount function nonparametrically under discounted expected utility (DEU). We then introduce a generalization of DEU adapted to our “time-risk” setup, which allows for a distinction between intertemporal substitution and risky utility and which accounts for anomalies regarding both discounted utility and expected utility. We show that, under DEU, time discounting is a direct measure of uncertainty regarding future outcomes. We find discounting obtained in our time-risk environement to systematically differ from discounting obtained in a riskless setup. The discrepancy only disappears once we correct not only for differences in utility but also for nonlinear probability weighting, taking into account the inherent riskiness of the future.