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Skewed noise

David Dillenberger and Uzi Segal

Journal of Economic Theory, 2017, vol. 169, issue C, 344-364

Abstract: We study the attitude of decision makers to skewed noise. For a binary lottery that yields the better outcome with probability p, we identify noise around p with a compound lottery that induces a distribution over the exact value of the probability and has an average value p. We propose and characterize a new notion of skewed distributions, and use a recursive non-expected utility to provide conditions under which rejection of symmetric noise implies rejection of negatively skewed noise, yet does not preclude acceptance of some positively skewed noise, in agreement with recent experimental evidence. In the context of decision making under uncertainty, our model permits the co-existence of aversion to symmetric ambiguity (as in Ellsberg's paradox) and ambiguity seeking for low likelihood “good” events.

Keywords: Skewed distributions; Compound lotteries; Recursive non-expected utility; Ambiguity aversion and seeking (search for similar items in EconPapers)
JEL-codes: D80 D81 (search for similar items in EconPapers)
Date: 2017
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