Future time reference and risk aversion

Abstract

Chen (2013) suggests a weak future time reference (FTR) language would encourage the speaker to undertake the investment through the distance effect (i.e., future appears closer with weak FTR) and the precision effect (i.e., weak FTR leads to less precise future reward timing which increases the expected future value due to the convex discounting function). This paper provides an analytic counterexample invalidating this conclusion. To be specific, Chen's argument assumes the speaker is risk neutral. We incorporate risk aversion into the consideration and show that both effects would magnify the return and the risk of the investment simultaneously. Consequently, an appropriate degree of risk aversion can overturn the Chen's conclusion. We show the waiting time to receive the return from the investment plays an important role. When the expected waiting time is short or the uncertainty of the waiting time is large, a weak FTR language is more likely to decrease the investment.