Categorical Salience Theory

Mark Schneider (), Cary Deck () and Patrick DeJarnette
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Mark Schneider: The University of Alabama
Patrick DeJarnette: Waseda University

Working Papers from Chapman University, Economic Science Institute

Abstract: Monetary lotteries are the overwhelmingly predominant tool for understanding decisions under risk. However, many real-world decisions concern multidimensional outcomes involving dierent goods. Recent studies have tested whether people treat multidimensional risky choices in the same manner as unidimensional monetary lotteries and found that choices over consumer goods are less risk-averse and more consistent with expected utility theory than choices over monetary lotteries. While these puzzling results cannot be explained by any standard model of decision making, we demonstrate that these ndings are predicted by a salience-based model of category-dependent preferences that also explains the classic anomalies for choices under risk. Additionally, we experimentally verify a novel prediction of this Categorical Salience Theory. We further demonstrate that our model can explain empirical puzzles in nancial markets, insurance markets, and principal agent settings, including behavior in a new portfolio choice experiment that is unexplained by expected utility theory or prospect theory.

Keywords: Salience; Categorization; Choice under Risk (search for similar items in EconPapers)
JEL-codes: D90 D91 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-evo and nep-upt
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:20-07

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