Dispersion-Skewness Theory of Decision Making under Risk
When people take decisions under risk, it is not only the expected utility that is important, but also the shape of the distribution of returns: clearly the dispersion is important, but also the skewness. For given dispersion, decision‐makers treat positively and negatively skewed prospects differently. This paper presents a new behaviourally‐inspired model for decision making under risk, incorporating both dispersion and skewness. We run a horse‐race of this new theory against seven other models of decision‐making under risk, and show that it outperforms many in terms of goodness of fit and, perhaps more importantly, predictive ability. It can incorporate the prominent anomalies of standard theory such as the Allais paradox, the valuation gap, and preference reversals.
- For the working paper, click here.
- To download the supplementary files such as output files and estimation programs, ranking tables, background information about anomalies, guidance for the output files, estimated preference functionals and the list of lotteries used in the experiment click here.
Oben K. Bayrak | PhD. in Economics | 2018 | [email protected]