Risk Preferences in Time Lotteries

TL;DR

This paper investigates how people make choices involving uncertain timing of payments, proposing that a growth-optimality model better explains observed behaviors than traditional expected discounted utility theory.

Contribution

It introduces a growth-optimality model for time lotteries and demonstrates its superior fit to experimental data compared to EDUT.

Findings

Growth-optimality aligns better with experimental evidence than EDUT.

Expected discounted utility theory predicts risk-seeking over time lotteries, which is less consistent with observed behavior.

Future experiments are proposed to further test growth-optimality as a decision-making model.

Abstract

An important but understudied question in economics is how people choose when facing uncertainty in the timing of events. Here we study preferences over time lotteries, in which the payment amount is certain but the payment time is uncertain. Expected discounted utility theory (EDUT) predicts decision makers to be risk-seeking over time lotteries. We explore a normative model of growth-optimality, in which decision makers maximise the long-term growth rate of their wealth. Revisiting experimental evidence on time lotteries, we find that growth-optimality accords better with the evidence than EDUT. We outline future experiments to scrutinise further the plausibility of growth-optimality.