2012
DOI: 10.1093/qje/qjs018
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Salience Theory of Choice Under Risk

Abstract: We present a theory of choice among lotteries in which the decision maker's attention is drawn to (precisely defined) salient payoffs. This leads the decision maker to a context-dependent representation of lotteries in which true probabilities are replaced by decision weights distorted in favor of salient payoffs. By specifying decision weights as a function of payoffs, our model provides a novel and unified account of many empirical phenomena, including frequent risk-seeking behavior, invariance failures such… Show more

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Cited by 1,054 publications
(471 citation statements)
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References 45 publications
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“…In a similar vein, increasing investors' sophistication is not only about increasing how much information they can process. 8 While we show that this may reduce mispricing, it need not eliminate it, as long as investors underestimate the strategic content of firms' reports. Institutions that specialize in deciphering firms' reports, such as rating agencies, appear useful in this respect.…”
Section: Introductionmentioning
confidence: 71%
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“…In a similar vein, increasing investors' sophistication is not only about increasing how much information they can process. 8 While we show that this may reduce mispricing, it need not eliminate it, as long as investors underestimate the strategic content of firms' reports. Institutions that specialize in deciphering firms' reports, such as rating agencies, appear useful in this respect.…”
Section: Introductionmentioning
confidence: 71%
“…11 Our model follows the spirit of Spiegler 9 See e.g. Bordalo, Gennaioli and Shleifer [8], Koszegi and Szeidl [42], Gabaix [24] and Pavan [49] for alternative behavioral modelling touching on targeted attention, and Di Maggio and Pagano [16] for a model of disclosure in which investors have different abilities to process complex information. 10 Benartzi [6] shows that employees' investment in company stock depends heavily on past returns (and that is not correlated to future returns); Greenwood and Nagel [25] document that inexperienced fund managers contributed to the Internet bubbles by chasing trends; Baquero and Verbeek [3] show that money tend to flow from poorly performing hedge funds to funds with good past performance (and this does not improve future returns).…”
Section: Overextrapolationmentioning
confidence: 99%
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“…However, present bias is not the only psychology that is relevant to decisions over these goods. Consumers may be inattentive to certain features of products; see for instance the focusing model of Koszegi and Szeidl (2013) or the salience model of Bordalo et al (2012). Consumers may not understand energy costs of different options; see the literature on the "MPG illusion" in Larrick and Soll (2008).…”
Section: Resultsmentioning
confidence: 99%
“…Bordalo et al (2012Bordalo et al ( , 2013aBordalo et al ( , b, 2015 and K} oszegi and Szeidl (2013) examine how individuals' attention is drawn towards attributes for which there is greater variation within the choice set and are overweighted in decision making.…”
Section: Literature Reviewmentioning
confidence: 99%