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Intertemporal choice under timing risk: an experimental approach

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This paper investigates how individuals evaluate and choose among delayed outcomes with more than one possible realization time. We first show that under a general expected discounted utility model, such decisions depend only on individuals' intertemporal preferences (i.e., the magnitude of the discount rates and the shape of the discount function). Next, we obtain several testable hypotheses using the EDU model as a benchmark and test these hypotheses in three experiments. In general, our results show that the EDU model is a poor predictor of intertemporal choice behavior in the presence of timing risk. In particular, we found evidence for timing risk aversion. Moreover, our findings show that individuals evaluate timing lotteries in a rank-dependent fashion, and the main driver of timing risk aversion is nothing but probabilistic risk aversion that stems from the nonlinear treatment of probabilities.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2006/2006-59.pdf

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Copyright INSEAD. All rights reserved