Salience Theory of Choice Under Risk / Pedro Bordalo, Nicola Gennaioli, Andrei Shleifer.

Format:

Book

Author/Creator:

Bordalo, Pedro.

Contributor:

National Bureau of Economic Research.

Gennaioli, Nicola.

Shleifer, Andrei.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16387.

NBER working paper series no. w16387

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

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.

Notes:

Print version record

September 2010.