Temporal Risk Resolution: Utility versus Probability Weighting Approaches.

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Summary This paper reports two experiments in which attitudes towards 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 towards temporal resolution-via the utility scaleunder Kreps and Porteus' (1978) recursive expected utility. We also analyze our data using a general recursive model that can reveal attitudes towards 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.
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