Salience and Skewness Preferences

Abstract

Whether people seek or avoid risks on gambling, insurance, asset, or labor markets crucially depends on the skewness of the underlying probability distribution. In fact, people typically seek positively skewed risks and avoid negatively skewed risks. We show that salience theory of choice under risk can explain this preference for positive skewness, because unlikely, but outstanding payoffs attract attention. In contrast to alternative models, however, salience theory predicts that choices under risk not only depend on the absolute skewness of the available options, but also on how skewed these options appear to be relative to each other. We exploit this fact to derive novel, experimentally testable predictions that are unique to the salience model and that we find support for in two laboratory experiments. We thereby argue that skewness preferences—typically attributed to cumulative prospect theory—are more naturally accommodated by salience theory.

To Buy or Not to Buy? Shrouding and Partitioning of Prices in an Online Shopping Field Experiment

“…The contrast effect is also in line with various empirical observations (e.g., Schkade and Kahneman, 1998;Dunn et al, 2003) and has been supported by recent lab experiments (e.g., Dertwinkel-Kalt et al, 2017;Dertwinkel-Kalt and Köster, 2018). For instance, Dertwinkel-Kalt et al ( 2017) find in a laboratory experiment on intertemporal choice that subjects prefer a single concentrated payment over several smaller payments that are dispersed over time.…”

Risk Taking with Left- and Right-Skewed Lotteries*

“…Thus, similar to these other studies, he finds that risk taking increases with greater skewness. The result in Dertwinkel-Kalt and Köster ( 2020 ) is similar, with subjects in their Experiment 1 more willing to choose the lottery over the safe option yielding the lottery’s expected value as the skewness of the lottery increases.…”

“… 10 Dertwinkel-Kalt and Koster ( 2020 ) also include several binary lotteries with negative skewness in their experimental tests of salience theory. …”

“…Subjects are then risk seeking when a lottery’s upside is salient and risk averse when its downside is salient. Dertwinkel-Kalt and Koster ( 2020 ) provide experimental evidence that salience (in particular, the contrast effect) can explain skewness preferences. Bayrak and Hey ( 2020 ) develop a different, behaviorally motivated, model of risky choices, where the skewness of the outcomes (as well as lottery dispersion and individual optimism) explicitly factors into the decision making process.…”

Bright line or lottery? On significance and value in medical decision making

“…The term 'skewness preferences' describes the fact that most people prefer right-skewed risks (which feature a small probability of a severe positive impact) and avoid left-skewed risks (which feature a small probability of a severe negative impact). This can explain why people at the same time pay for insurance against leftskewed risks that yield a rather large loss with a small probability and seek right-skewed risks such lotteries that are defined by large gain with a small probability [14].…”