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

Abstract

"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]