Common ratio using delay

Abstract

We present an experiment in which we add a common delay in a choice between two risky prospects. The results show that delay produces the same change in preferences as in the well-documented common ratio effect in risky lotteries. The added common delay acts as if the probabilities were divided by some common ratio. Moreover, we show that there is a strong magnitude effect, in the sense that the effect of delay depends on the magnitude of the outcome. The results are consistent with the recently introduced probability time trade-off (PTT) model by Baucells and Heukamp. We present a parameterization of the model based on the experimental results, showing that the value function exhibits increasing relative risk aversion, the weighting function is s-shaped, and the intrinsic discount rate is decreasing.