This paper reports measures of preference parameters relating to risk tolerance, time preference, and intertemporal substitution. These measures are based on survey responses to hypothetical situations constructed using an economic theorist's concept of the underlying parameters. The individual measures of preference parameters display heterogeneity. Estimated risk tolerance and the elasticity of intertemporal substitution are essentially uncorrelated across individuals. Measured risk tolerance is positively related to risky behaviors, including smoking, drinking, failing to have insurance, and holding stocks rather than Treasury bills. These relationships are both statistically and quantitatively significant, although measured risk tolerance explains only a small fraction of the variation of the studied behaviors. Robert B. Barsky F. Thomas Juster Miles S. Kimball Matthew D. Shapiro Survey Research Center and Department of Economics University of Michigan Ann Arbor, MI 48109 tel. 313 ...

When utility is non-separable in nondurable and durable consumption and the elasticity of substitution between the goods is high, marginal utility rises when durable consumption falls. The model explains both the cross-sectional variation in expected stock returns and the time variation in the equity premium. Small stocks and value stocks deliver relatively low returns during recessions when durable consumption falls, which explains their high average returns relative to big stocks and growth stocks. Stock returns are unexpectedly low at business-cycle troughs when durable consumption falls sharply, which explains the counter-cyclical variation in the equity premium.

This paper examines how aversion to risk and aversion to intertemporal substitution determine the strength of the precautionary saving motive in a twoperiod model with KrepsPorteus preferences. For small risks, we derive a measure of the strength of the precautionary saving motive which generalizes the concept of “prudence ” introduced by Kimball (1990b). For large risks, we show that decreasing absolute risk aversion guarantees that the precautionary saving motive is stronger than risk aversion, regardless of the elasticity of intertemporal substitution. Holding risk preferences fixed, the extent to which the precautionary saving motive is stronger than risk aversion increases with the elasticity of intertemporal substitution. We derive sufficient conditions for a change in risk preferences alone to increase the strength of the precautionary saving motive and for the strength of the precautionary saving motive to decline with wealth. Within the class of constant elasticity of intertemporal substitution, constantrelative risk aversion utility functions, these conditions are also necessary.

Experimentally elicited discount rates are frequently higher than what one would infer from market interest rates and seem unreasonable for economic decision-making. Such high rates have often been attributed to dynamic inconsistency, as in present bias and hyperbolic discounting. A commonly recognized bias of standard elicitation techniques is the use of linear preferences for identification. We present a novel methodology for identifying time preferences, both discounting and utility function curvature, from simple allocation decisions. We estimate annual discount rates substantially lower than normally obtained, and limited though significant utility function curvature. Additionally, our data show no evidence of dynamic inconsistency.

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