Balancing on a Budget Line
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Date
2013Type
- Working Paper
ETH Bibliography
yes
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Abstract
A key claim in a recent paper by Andreoni and Sprenger (2012b) (AS) is that their evidence on intertemporal risk taking behavior is not only at odds with classical discounted expected utility theory but also with rank-dependent models involving probability weighting, such as rank-dependent utility and cumulative prospect theory. AS argue in favor of utility differing over the domains of certainty and uncertainty (“u-v” model). Here we show that, contrary to their claim, rank-dependent models provide a unified account for their data on subjects’ budget allocations to portfolios of sooner and later payments. Moreover, the u-v model cannot explain recent evidence that intertemporal risk taking varies significantly with the presence of hedging opportunities, while rank-dependent models can explain these findings. Thus, rank-dependent models provide not only an explanation for the evidence in AS but also for evidence that contradicts the u-v model. Show more
Publication status
publishedPublisher
ETH ZürichOrganisational unit
03361 - Schubert, Renate (emeritus) / Schubert, Renate (emeritus)
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ETH Bibliography
yes
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