Local thinking and skewness preferences

Arbeitspapier

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.

Object Details

• ISBN: 978-3-86304-247-9
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: DICE Discussion Paper ; No. 248

Classification and Topics

• Classification: Wirtschaft ; Criteria for Decision-Making under Risk and Uncertainty
• Subject: stimulus-driven attention ; salience theory ; focusing ; certainty equivalent ; monotonicity ; skewness preferences

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dertwinkel-Kalt, Markus ; Köster, Mats
• Event: Veröffentlichung
• (who): Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE)
• (where): Düsseldorf
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/157231
• Last update: 10.03.2025, 11:41 AM CET