Salience Theory of Choice Under Risk

Pedro Bordalo, Nicola Gennaioli and Andrei Shleifer

The Quarterly Journal of Economics, 2012, vol. 127, issue 3, 1243-1285

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 as the Allais paradox, and preference reversals. It also yields new predictions, including some that distinguish it from prospect theory, which we test. JEL Codes: D03, D81. Copyright 2012, Oxford University Press.

Date: 2012
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Working Paper: Salience Theory of Choice Under Risk (2012)
Working Paper: Salience theory of choice under risk (2011)
Working Paper: Salience Theory of Choice Under Risk (2010)
Working Paper: Salience Theory of Choice Under Risk
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