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Essays on Risk and Time

  • Author(s): FELDMAN, PAUL J
  • Advisor(s): Sprenger, Charlie D
  • et al.

The first chapter studies preferences for mixing between lotteries. Behavioral theories can be distinguished by different attitudes towards mixing between lotteries. Using a revealed preference approach, we conduct an individual choice experiment in which subjects choose from different linear budgets, covering the space of three-outcome lotteries. Using experimental choices, we determine whether behavior can be explained by any increasing quasiconcave---in the probabilities---utility model and whether mixing behavior is consistent with a ``desire to randomize". The main finding is pervasive evidence of a preference for non-degenerate mixing over lotteries and that these choices can be organized according to revealed preferences. We also relate this result to previous experimental evidence of a ``desire to randomize"---non-constant choices in repeated binary decisions---to mixing behavior in budgets. Moreover, we test the out-of-sample predictive accuracy of various models on our data. The overall results lend clear support for the quasiconcavity of risk-preferences that has implications for a range of topics, from incentive design to game theory.

The second chapter explores the effect of two different frames on preferences for randomization. Given the prior evidence of an explicit desire to randomize---non-degenerate distributions/mixtures over two lotteries---we study the effects of framing. The distinct feature between the frames is whether outcomes are presented as losses or gains, while final wealth outcomes remain the same. We find losses increase the chance subjects place on more extreme outcomes and that mixing, in general, is less frequent than under gains. Moreover, our results suggest choices conform more with rationality under losses. This suggests frames affect when and how individuals randomize. The effect is consistent with a cautious Expected Utility interpretation: subjects randomize as a hedge against multiple preferences and under gains more possible preferences are considered.

The third chapter evaluates the order in which intertemporal risks are assessed. Recent debate has identified important gaps in the understanding of intertemporal risks. Critical to closing these gaps is evidence on which dimension of realized intertemporal risks---the risk or the time---is evaluated first. Though under discounted expected utility this ordering is of no consequence, under discounted non-expected utility models the order of evaluation is critical. We provide experimental tests in which different orderings of evaluation generate different predictions for behavior. We find more support for the notion that the risk dimension is evaluated first.

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