Temporal Risk: Utility vs. Probability Weighting
Mohammed Abdellaoui, Enrico Diecidue, Emmanuel Kemel, Ayse Onculer
Management Science · 2022 · Volume 68 · Issue 7
Abstract
This paper reports two experiments in which attitudes toward temporal risk resolution is elicited from choices between two-outcome lotteries that pay out at some future fixed date and can be resolved either now or later. We show that matching probabilities provides a simple method to measure attitudes toward temporal resolution—via the utility scale—under the recursive expected utility of Kreps and Porteus. We also analyze our data using a general recursive model that can reveal attitudes toward temporal risk resolution through the utility scale and/or the probability weighting scale. In terms of goodness of fit, as well as of prediction accuracy, our results point to a better performance of the probability weighting approach. More specifically, we show that individuals become less sensitive and more pessimistic with respect to winning probabilities when lotteries are resolved later rather than now. This paper was accepted by George Wu, decision analysis.
Keywords
temporal resolution of uncertainty, temporal risk, recursive expected utility, preference for early resolution, probability weighting, recursive rank-dependent utility, time preference, risk preference
Enable JavaScript for citation tools and additional paper interactions.