Risk Taking with Left-and Right-Skewed Lotteries *

Douadia Bougherara, Lana Friesen () and Céline Nauges ()
Additional contact information
Lana Friesen: UQ [All campuses : Brisbane, Dutton Park Gatton, Herston, St Lucia and other locations] - The University of Queensland
Céline Nauges: TSE-R - TSE-R Toulouse School of Economics – Recherche - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: While much literature has focused on preferences regarding risk, preferences over skewness also have significant economic implications. An important and understudied aspect of skewness preferences is how they affect risk taking. In this paper, we design a novel laboratory experiment that elicits certainty equivalents over lotteries where the variance and skewness of the outcomes are orthogonal to each other. This design enables us to cleanly measure both skewness seeking/avoiding and risk taking behavior, and their interaction, without needing to make parametric assumptions. Our experiment includes both left-and right-skewed lotteries. The results reveal that the majority of subjects are skewness avoiding risk takers who correspondingly also take more risk when facing less skewed lotteries. Our second contribution is to link these choices to individual rank-dependent utility preference parameters estimated using a separate lottery choice protocol. Using a latent-class model, we are able to identify two classes of subjects: skewness avoiders with the classic inverse s-shaped probability weighting function and skewness neutral subjects that do not distort probabilities. Our results thus demonstrate the link between probability distortion and skewness seeking/avoidance choices. They also highlight the importance of accounting for individual heterogeneity.

Keywords: Risk Skewness Laboratory Experiment Probability Weighting JEL classification: C91 D81; Risk; Skewness; Laboratory Experiment (search for similar items in EconPapers)
Date: 2020
Note: View the original document on HAL open archive server: https://hal.inrae.fr/hal-04972008v1
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Related works:
Journal Article: Risk Taking with Left- and Right-Skewed Lotteries* (2021)
Working Paper: Risk Taking with Left- and Right-Skewed Lotteries (2021)
Working Paper: Risk Taking with Left- and Right-Skewed Lotteries (2020)
Working Paper: Risk Taking with Left- and Right-Skewed Lotteries (2020)
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