Global Warming's Human Preferences

Understanding of how individuals discount and evaluate risks has priority in designing efficient and effective policies on how to mitigate global warming. A large body of experimental evidence has confirmed that people violate exponential discounting as well as expected utility. In fact, people's behaviour is better characterised by hyperbolic discounting and cumulative prospect theory. In the last-mentioned, an individual's risk attitude is determined jointly by the curvature in the utility value function and distortion of probabilities, or sub proportionality, in the probability weighting function. It is questioned what the relationship is between these risk and time preferences. Based on an incentivised experiment, it is demonstrated that subjects' risk aversion and discount rate are inversely related. This means that an individual's degree of probabilistic optimism - captured by overweighting of small probabilities in a person's inverted S-shaped probability weighting function - increases an individual's (constant) discount rate. By contrast, curvature of the utility function is not significantly correlated with an individual's time preference. As a result, subjects are categorised as either low or high patience types. Low patience types exhibit high discounting and optimism towards small probabilities, whereas high patience types demonstrate lower optimism and low discounting. Hyperbolic discounting is not as common as expected. Lastly, there is no support for the hypothesis that time or risk preferences are correlated with a subject's attitude towards global warming.