A fundamental question in development economics is the extent to which economic success is linked to basic features of human preferences. If people are extremely averse to financial risk, they may be reluctant to create businesses that may have inherently risky cash flows. If people are impatient, they may be reluctant to invest and educate their children.
Taken together, risk aversion and impatience may explain, in part, why some major development goals remain unsuccessful. Empirical research by economists on risk aversion and impatience has generally been concerned with its measurement in terms of income and consumption. Behind this metric lies the concept of utility, or welfare, which people are assumed to derive from income and consumption. Yet there is no attempt to measure risk aversion and impatience in terms of reported utility, that is subjectively perceived welfare. In this paper we compare the latter approach with the conventional one, attempting to gain insights from new research on the subjective well-being for understanding basic features of human preferences in Indonesia. Using ordered logistic approach, we show that actual economic standing is by far the most consistent variable in determining the risk and time preferences.
Discussant: Dr. Mohamad Fahmi
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