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Related Experiment Video

Updated: Jun 10, 2026

Measuring Delay Discounting in Humans Using an Adjusting Amount Task
07:47

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Published on: January 9, 2016

Precautionary Saving and Consumption Smoothing Across Time and Possibilities.

Miles Kimball, Philippe Weil

    Journal of Money, Credit, and Banking
    |August 3, 2010
    PubMed
    Summary

    This study reveals how risk aversion and intertemporal substitution shape precautionary saving. Higher elasticity of intertemporal substitution strengthens the precautionary saving motive, especially with decreasing absolute risk aversion.

    Area of Science:

    • Economics
    • Behavioral Economics
    • Financial Economics

    Background:

    • The precautionary saving motive is crucial for understanding economic behavior under uncertainty.
    • Existing models often simplify the complex interplay between risk aversion and intertemporal choices.
    • Selden/Kreps-Porteus preferences offer a nuanced framework for analyzing these decisions.

    Purpose of the Study:

    • To investigate how aversion to risk and aversion to intertemporal substitution influence the strength of the precautionary saving motive.
    • To generalize the concept of "prudence" for small risks and analyze its behavior for large risks.
    • To derive conditions under which changes in risk preferences and wealth affect precautionary saving.

    Main Methods:

    • Development of a two-period economic model.

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    Last Updated: Jun 10, 2026

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    Published on: August 25, 2023

  • Utilizing Selden/Kreps-Porteus utility functions to represent preferences.
  • Derivation of analytical measures for the precautionary saving motive.
  • Analysis of the impact of decreasing absolute risk aversion and elasticity of intertemporal substitution.

    • Main Results:

    • A generalized measure of the precautionary saving motive is derived, extending Kimball's "prudence."
    • For large risks, decreasing absolute risk aversion ensures a stronger precautionary saving motive than risk aversion itself.
    • The precautionary saving motive strengthens with increased elasticity of intertemporal substitution, holding risk preferences constant.
    • Sufficient conditions are identified for risk preferences to increase the precautionary saving motive and for it to decline with wealth.

    Conclusions:

    • Risk and intertemporal substitution preferences are key determinants of precautionary saving behavior.
    • The findings provide a more comprehensive understanding of precautionary saving under various risk scenarios.
    • The derived conditions offer insights into wealth effects and preference shifts on saving decisions.