"Time Lotteries"

We study preferences over lotteries that pay a specific prize at uncertain dates. Expected Utility with convex discounting implies that individuals prefer receiving $x in a random date with mean t over receiving $x in t days for sure. Our experiment rejects this prediction. It suggests a link between preferences for payments at certain dates and standard risk aversion. Epstein-Zin (1989) preferences accommodate such behavior, and fit the data better than a model with probability weighting. We thus provide another justification for disentangling attitudes toward risk and time, as in Epstein-Zin, and suggest new theoretical restrictions on its key parameters.

Information

Paper Number: 15-026

Paper Year: 2015

Authors:

Patrick DeJarnette
David Dillenberger
Daniel Gottlieb
Pietro Ortoleva