Salience Theory of Choice Under Risk

Pedro Bordalo, Nicola Gennaioli and Andrei Shleifer

No 16387, NBER Working Papers from National Bureau of Economic Research, Inc

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 endogenizing 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. We also use the model to modify the standard asset pricing framework, and use that application to explore the well-known growth/value anomaly in finance.

JEL-codes: D03 D81 (search for similar items in EconPapers)
Date: 2010-09
Note: AP CF
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Citations: View citations in EconPapers (20)

Published as Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2012. "Salience Theory of Choice Under Risk," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1243-1285.

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Related works:
Journal Article: Salience Theory of Choice Under Risk (2012)
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
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