Risk preferences are not time preferences

Abstract

Risk and time are intertwined. The present is known while the future is inherently risky. Discounted expected utility provides a simple, coherent struc-ture for analyzing decisions in intertemporal, uncertain environments. Critical to such analysis is the notion that certain and uncertain utility are functionally interchangeable. We document an important and robust violation of discounted expected utility, which is essentially a violation of this interchangeability. In pa-rameter estimations, certain utility is found to be almost linear while uncertain utility is found to be substantially more concave. These results have implications for discounted expected utility theory and decision theory in general. Applica-tions are made to dynamic inconsistency, the uncertainty effect, the estimation of risk preferences and probability weighting. JEL classification