An OCE Analysis of the Effect of Uncertainty on Saving Under Risk Preference Independence

This paper is concerned with the effects of capital risk on optimal individual savings decisions in a simple two-period setting. We investigate the respective roles played by risk and time preferences in answering the following related questions: Q1: Will savings increase, remain constant or decrease in response to an increase in capital risk? Q2: Is optimal saving in the presence of capital risk greater than, equal to or less than optimal saving in the certainty case where the rate of return equals the mean (uncertain) return?