Lecture on   Intertemporal Risk Attitude


Introduction and overview:
     ARE Departmental Seminar on Friday 7th of September, 12:10pm
(not necessary to take the lecture, but helpful and recommended)
Start of regular lecture: Wednesday, 12th of September
Meets: Lecture ended
Content:
     In the standard model of intertemporal choice, utility is additive over time and over risk. As a consequence, agents have the same propensity to smooth consumption over time as they have to 'smooth consumption over risk states'. In the lecture, we combine the von Neumann & Morgenstern (1944) axioms with additive separability on certain consumption paths. We find that these assumptions imply a significantly more general model than the (time and uncertainty additive) standard model. In the generalized framework, we introduce a new notion of (multi-commodity) risk aversion that is independent of the good under observation and its measure scale.
Epstein & Zin (1989,1991) have introduced a widespread (recursive) one commodity model that allows to disentangle Arrow-Pratt risk aversion from intertemporal substitutability. We discuss the relation of their (isoelastic) model to the general mulit-commodity framework. We also look at a simpler, non-recursive model that is able to disentangle the two characteristics of choice. We relate the introduced notion of risk aversion to Kreps & Porteus' (1978) preference for the timing of risk resolution and analyze its relation to discounting.
Structure: 4+4 lectures with a one week break inbetween
     1   Atemporal Uncertainty Revisited
2   A Simplified 2 Period Model
3   Epstein Zin and Measure Scale Dependence
4   Intertemporal Risk Aversion
5   The General Model
6   The Isoelastic Model
7   A Preference for the Timing of Risk Resolution
8   Stationarity and Discounting
The first 4 lectures introduce the disentanglement of Arrow Pratt risk aversion and intertemporal substitutability and the concept of intertemporal risk aversion in a simplied two period framework. The general model will be discussed in lecture 5 and is based on the paper
Wouldn't it be Nice to Know Whether Robinson is Risk Averse?
Lectures 6-8 analyze reasonable axiomatic simplifications of the general setting that lead to more tractable model structures.
Material:
     0   Seminar Talk (slides)
1   Handout 1
2   Handout 2
3   Handout 3
4   Handout 4
     Collected Lecture Notes 1-4 (A Simple Introduction to Intertemporal Risk Aversion)
Motivating Example (Elaboration of Example in Lecture 2)
     5   Handout 5 (slides)
6   Handout 6 (slides)
7   Handout 7 (slides)
8   Handout 8 (slides)