Uncertainty Breeds Decreasing Impatience: The Role of Risk Preferences in Time Discounting

Thomas F. Epper, Helga Fehr-Duda, Adrian Bruhin
2009 Social Science Research Network  
Future events are uncertain by their very nature. Therefore, people's risk preferences are likely to play a role in the valuation of allegedly guaranteed future outcomes. We show that future uncertainty conjointly with people's proneness to nonlinear probability weighting generates a unifying framework for explaining many anomalies in intertemporal choice, such as hyperbolic discounting and subadditivity of discount factors. Moreover, our approach implies that higher uncertainty of future
more » ... cts increases the hyperbolicity of discount rates, suggesting that institutional deficiencies such as lack of contract enforcement, may be a source of hyperbolic discounting behavior. Based on an experiment with monetary incentives, we show that people's risk taking behavior is indeed a significant determinant of their time discounting behavior: Greater departures from linear probability weighting predict a stronger decline in impatience on the level of individual behavior.
doi:10.2139/ssrn.1416007 fatcat:3j5ssj37kzcmznbccswffpjh4a