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 (multicommodity) 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 ArrowPratt risk aversion from intertemporal substitutability. We discuss the relation of their (isoelastic) model to the general mulitcommodity framework. We also look at a simpler, nonrecursive 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 68 analyze reasonable axiomatic simplifications of the general setting that lead to more tractable model structures.


Material:



