Decisions under risk: Dispersion and skewness

Oben K. Bayrak () and John Hey
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Oben K. Bayrak: Centre for Environmental and Resource Economics (Umeå, Sweden) and Department of Economics, University of Gothenburg

Journal of Risk and Uncertainty, 2020, vol. 61, issue 1, No 1, 24 pages

Abstract: Abstract When people take decisions under risk, it is not only the expected utility that is important, but also the shape of the distribution of utility: clearly the dispersion is important, but also the skewness. For given mean and dispersion, decision-makers treat positively and negatively skewed prospects differently. This paper presents a new behaviourally-inspired model for decision making under risk, incorporating both dispersion and skewness. We run a horse race of this new model against six other models of decision making under risk and show that it outperforms many in terms of goodness of fit and shows a reasonable performance in predictive ability. It can incorporate the prominent anomalies of standard theory such as the Allais paradox, the valuation gap, and preference reversals, and also the behavioural patterns observed in experiments that cannot be explained by Rank Dependent Utility Theory.

Keywords: Decision under risk; Dispersion; Skewness; Non-expected utility; Pairwise choice; Stochastic specifications; Anomalies (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (9)

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Working Paper: Decisions under Risk Dispersion and Skewness (2019)
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DOI: 10.1007/s11166-020-09333-6

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