Risk Aversion and the Subjective Time Discount Rate: A Joint Approach

In this paper we analyze a large sample of individual responses to six lottery questions. We derive a simultaneous estimate of risk aversion and the time preference discount rate per individual. This can be done because the consumption of a large prize is smoothed over a larger time period. It is found that both parameters strongly vary over individuals, while they are moderately negatively correlated. Furthermore we explain the estimated relative risk aversion and time preference by income, age, gender, entrepreneurship and an obesity index. Very significant effects are found. If we explain relative risk aversion in a simple model where time discounting is ignored, we find completely different estimates for this parameter. We conclude that in the case of lotteries with big prizes a simultaneous estimate of risk aversion and time preference is needed in order to avoid misspecificationexpected utility, risk aversion, time preference, lotteries, hypothetical questions

The effect of the supplementary grant on parental contribution in the Netherlands

Recently, there has been considerable debate about a reform of the Dutch system of student support, in which grants will be (partly) replaced by loans. The discussion focuses on the effects on student enrollment decisions. Surprisingly, no study has yet analysed the effect of receiving a grant on parental contribution. Parents may decrease their contribution when their child receives a grant, in which case subsidies meant for the students unintentionally end up with the parents. Understanding the corresponding parental behaviour will contribute to a more in-depth discussion on the financial aid system. This paper focuses on the effect of the supplementary grant on the parental contribution in the Netherlands. The supplementary grant is meant to support students from disadvantaged families. Parents from students with the supplementary grant have less disposable income, which probably implies a lower contribution. Our identification strategy separates this income effect from the effect due to the payments of the supplementary grant. The results suggest substantial substitution. Each additional euro spent on supplementary grant reduces the parental contribution with approximately 20-60 cents. A broad range of sensitivity analyses support our main estimation results. Nevertheless, some caution in interpreting the results is needed because of data limitations.

A Parametric Analysis of Prospect Theory's Functionals for the General Population

This paper presents the results of an experiment that completely measures the utility function and probability weighting function for different positive and negative monetary outcomes, using a representative sample of N = 1935 from the general public. The results confirm earlier findings in the lab, suggesting that utility is less pronounced than what is found in classical measurements where expected utility is assumed. Utility for losses is found to be convex, consistent with diminishing sensitivity, and the obtained loss aversion coefficient of 1.6 is moderate but in agreement with contemporary evidence. The estimated probability weighing functions have an inverse-S shape and they imply pessimism in both domains. These results show that probability weighting is also an important phenomenon in the general population. Women and lower educated individuals are found to be more risk averse, in agreement with common findings. Unlike previous studies that ascribed gender differences in risk attitudes solely to differences in the degree utility curvature, however, our results show that this finding is primarily driven by loss aversion and, for women, also by a more pessimistic psychological response towards the probability of obtaining the best possible outcome.prospect theory, utility for gains and losses, loss aversion, subjective probability weighting

Risk Aversion and the Subjective Time Discount Rate: A Joint Approach

In this paper we analyze a large sample of individual responses to six lottery questions. We derive a simultaneous estimate of risk aversion and the time preference discount rate per individual. This can be done because the consumption of a large prize is smoothed over a larger time period. It is found that both parameters strongly vary over individuals, while they are moderately negatively correlated. Furthermore we explain the estimated relative risk aversion and time preference by income, age, gender, entrepreneurship and an obesity index. Very significant effects are found. If we explain relative risk aversion in a simple model where time discounting is ignored, we find completely different estimates for this parameter. We conclude that in the case of lotteries with big prizes a simultaneous estimate of risk aversion and time preference is needed in order to avoid misspecificatio

A Parametric Analysis of Prospect Theory's Functionals for the General Population

This paper presents the results of an experiment that completely measures the utility function and probability weighting function for different positive and negative monetary outcomes, using a representative sample of N = 1935 from the general public. The results confirm earlier findings in the lab, suggesting that utility is less pronounced than what is found in classical measurements where expected utility is assumed. Utility for losses is found to be convex, consistent with diminishing sensitivity, and the obtained loss aversion coefficient of 1.6 is moderate but in agreement with contemporary evidence. The estimated probability weighing functions have an inverse-S shape and they imply pessimism in both domains. These results show that probability weighting is also an important phenomenon in the general population. Women and lower educated individuals are found to be more risk averse, in agreement with common findings. Unlike previous studies that ascribed gender differences in risk attitudes solely to differences in the degree utility curvature, however, our results show that this finding is primarily driven by loss aversion and, for women, also by a more pessimistic psychological response towards the probability of obtaining the best possible outcome.loss aversion, utility for gains and losses, prospect theory, subjective probability weighting

Enriching Students Pays Off: Evidence from an Individualized Gifted and Talented Program in Secondary Education

We examine the effect of a gifted and talented program in academic secondary education. Students are assigned based on a cutoff score in a cognitive aptitude test, which we exploit in a fuzzy regression discontinuity framework to identify program effects. We find that assigned students obtain higher grades, follow a more science intensive curriculum (most notably for girls), and report stronger beliefs about their academic abilities. We also find that these positive effects persist in university, where students choose more challenging fields of study with, on average, higher returns. Together, these findings are consistent with a human capital interpretation

Risk Aversion and the Subjective Time Discount Rate: A Joint Approach

In this paper we analyze a large sample of individual responses to six lottery questions. Wederive a simultaneous estimate of risk aversion ? and the time preference discount rate ? perindividual. This can be done because the consumption of a large prize is smoothed over a largertime period. It is found that ? and ? strongly vary over individuals, while they are negativelycorrelated with a correlation coefficient of -.3. Furthermore we explain ? and ? by income,age, gender, entrepreneurship and an obesity index. Very significant effects are found. If weexplain ? in a simple model where time discounting is ignored, we find completely differentestimates for ? . We conclude that in the case of lotteries with big prizes a simultaneous estimateof ? and ? is needed in order to avoid misspecification

A simultaneous approach to the estimation of risk aversion and the subjective time discount rate

"In this paper we analyze a sample of 1,832 individuals who responded to six randomly generated lottery questions that differ with respect to chance, prize and the timing of the draw. Using a model that explicitly allows for consumption smoothing, we obtain an estimate of relative risk aversion of 82. Instead, assuming consumption to be immediate gives an estimate of 2, close to what is traditionally reported, while a model of full asset integration gives estimates higher by several orders of magnitude. Our results show that estimated risk aversion is sensitive to the assumptions made with respect to the consumption profile and that it is possible to determine the level of asset integration endogenously. The average subjective time discount rate, which includes a preference for the present, equals 6% per month. It is found that both parameters vary strongly over individuals and that the variation can be explained by income, age, gender, and entrepreneurship, consistent with the majority of previous evidence." [author's abstract

Adaptive Haar wavelets for the angular discretisation of spectral wave models

A new framework for applying anisotropic angular adaptivity in spectral wave modelling is presented. The angular dimension of the action balance equation is discretised with the use of Haar wavelets, hierarchical piecewise-constant basis functions with compact support, and an adaptive methodology for anisotropically adjusting the resolution of the angular mesh is proposed. This work allows a reduction of computational effort in spectral wave modelling, through a reduction in the degrees of freedom required for a given accuracy, with an automated procedure and minimal cost

Your money and your life: risk attitudes over gains and losses

Prospect theory is the most influential descriptive alternative to the orthodox model of rational choice under risk and uncertainty, in terms of empirical analyses of some of its principal parameters and as a consideration in behavioural public policy. Yet the most distinctive implication of the theory – a fourfold predicted pattern of risk attitudes called the reflection effect – has been infrequently studied and with mixed results over money outcomes, and has never been completely tested over health outcomes. This article reports tests of reflection over money and health outcomes defined by life years gained from treatment. With open valuation exercises, the results suggest qualified support for the reflection effect over money outcomes and strong support over health outcomes. However, in pairwise choice questions, reflection was substantially ameliorated over life years, remaining significant only for treatments that offered short additional durations of life