Deciding under Doubt: A Theory of Risk Aversion, Time Discounting Preferences, and Educational Decision-making

Abstract

We develop a rational choice model of educational decision-making in which the utility of educational choices depends on students’ risk aversion and their time discounting preferences. We argue for the role of risk aversion and time discounting preferences in the choice of different tracks in secondary education and in mediating the impact of socioeconomic background on such choices. Enrolment decisions in Danish secondary education provide our empirical example, and the results are generally in line with the proposed theory in that (i) risk aversion deters students from choosing the academically challenging but economically rewarding academic track in secondary education, (ii) students with a low time discount rate are particularly likely to enter the academic track, and (iii) students from advantaged socioeconomic backgrounds are not affected by risk aversion when making educational decisions.