Notes on "Risk Preferences Are Not Time Preferences" (Andreoni, James; Sprenger, Charles)

Risk Preferences Are Not Time Preferences

Andreoni, James; Sprenger, Charles

American Economic Review, 2012, Vol.102(7), pp.3357-3376 [Peer Reviewed Journal]

Relevant literature:

Frederick, Loewenstein, and O’Donoghue 2002 

Allais (1953) 

Camerer (1992) 

Harless and Camerer (1994)

Starmer (2000) 

Andreoni and Sprenger (2012a) 

Halevy 2008 

Green 1987 

Machina 1989 

We construct our test using two baseline risk conditions: 

1. a risk-free condition where all payments, both sooner and later, will be made 100 percent of the time
2. a risky condition where, independently, sooner and later payments will be made only 50 percent of the time, with all uncertainty resolved during the experiment 

the standard discounted expected utility (DEU) model is written 

       T
U = ∑ δt+kE[v(ct+k)] 

      k=0

the future is inherently risky

If individuals exhibit a preference for certainty when it is available, then present certain consumption will be favoured over future uncertain consumption. When only uncertain future consumption is considered, individuals act more closely in line with expected utility and apparent preference reversals are generated.