EconPapers    
Economics at your fingertips  
 

Local Thinking and Skewness Preferences

Markus Dertwinkel-Kalt () and Mats Köster

No 97, Working Paper Series in Economics from University of Cologne, Department of Economics

Abstract: We show that continuous models of stimulus-driven attention can account for skewness-related puzzles in decision-making under risk. First,we delineate that these models provide awell-defined theory of choice under risk. We therefore prove that in continuous—in contrast to discrete—models of stimulus-driven attention each lottery has a unique certainty equivalent that is monotonic in probabilities (i.e., it monotonically increases if probability mass is shifted to more favorable outcomes). Second, we show that whether an agent seeks or avoids a specific risk depends on the skewness of the underlying probability distribution. Since unlikely, but outstanding payoffs attract attention, an agent exhibits a preference for right-skewed and an aversion toward left-skewed risks. While cumulative prospect theory can also account for such skewness preferences, it yields implausible predictions on their magnitude. We show that these extreme implications can be ruled out for continuous models of stimulus-driven attention.

Date: 2017-07-26
New Economics Papers: this item is included in nep-mic, nep-neu and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
https://ockenfels.uni-koeln.de/fileadmin/wiso_fak/ ... _download/wp0097.pdf (application/pdf)

Related works:
Working Paper: Local thinking and skewness preferences (2017) Downloads
Working Paper: Local Thinking and Skewness Preferences (2017) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kls:series:0097

Access Statistics for this paper

More papers in Working Paper Series in Economics from University of Cologne, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Kiryl Khalmetski ().

 
Page updated 2020-07-28
Handle: RePEc:kls:series:0097