Empirical Essays on Risk, Time Preference, Islam and Religiosity

Abstract

This dissertation reexamines the determinants of individual risk aversion and time preferences, and their correlation with religion, religiosity, and various demographic and non-demographic factors. Utilizing data from the IFLS 5 survey in Indonesia, the study employs regression methods to investigate the interplay of trust and religiosity variables in explaining risk aversion behavior. A logistic regression model is used, leveraging six risk preference elicitation questions. To understand time preferences, the study categorizes participants' choices into different levels and analyzes associated factors through multivariate ordered logistic and logistic regression models. Additionally, the study explores risk preference in Islamic financial institutions across Bahrain, United Arab Emirates, United Kingdom, Malaysia, and Indonesia through semi-structured interviews. It seeks to explain the concepts of time value of money, time preference, and interest rates from a Sharia perspective and gain insights from Islamic economists and finance stakeholders.

The results reveal that religion, religiosity, and their interaction have less influence on individual risk aversion in the Indonesian context. Instead, the trust index significantly influences riskier choices. Neither religion nor religiosity affected time preference in the short (one year) or medium term (five years) for all types of preferences. Socio-economic and demographic variables emerged as key covariates of positive time preferences. Regarding Muslims' risk behavior, empirical findings were conflicting, with some studies finding Muslims risk-averse and others risk-takers. Experts established no specific Islamic injunction dictating risk preference behavior. The study found Muslims exhibiting risk-loving and risk-averse preferences, as well as zero, negative, and positive time preferences. Most Muslim participants were risk-averse with positive time preferences. However, econometric models could not confirm relationships between these behaviors and religion or religiosity.

Ultimately, the dissertation enhances understanding of risk and time preference dynamics within socio-cultural contexts, providing insights for policymakers and financial practitioners.