Consumption decisions under uncertainty
Publisher Summary This chapter discusses three issues related to consumption decisions under uncertainty, namely, the determinants of risk aversion for future consumption, the impact of uncertainty about future resources on current consumption, and the separability of consumption decisions and portfolio choices. These issues are discussed in the context of a simple model introduced, together with the assumptions, in the chapter. The chapter presents a derivation of a (local) measure of risk aversion for delayed risks which, like the Pratt measure in the timeless context, represents twice the risk premium per unit of variance for infinitesimal risks. The aversion for delayed risks grows as curvature of the indifference loci increases, or consumers who would respond strongly to a (compensated) change in the rate of interest are relatively better suited to carry delayed risks.