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A critical note on Salience Theory of choice under risk

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  • Kontek, Krzysztof

Abstract

Salience Theory Bordalo et al. (2012a) is a context-dependent theory of choice under risk, where objective probabilities are replaced by decision weights distorted in favor of salient payoffs. The detailed analysis presented in this paper points out serious flaws in this model, the most serious of which is that the lottery certainty equivalent is undefined for some ranges of probabilities. Moreover, the model violates monotonicity. The origin of the peculiar features of the model lies in switching between different evaluation expressions that depend on salience conditions or the number of prospect payoffs. The number of evaluation expressions and switching values grows rapidly with the number of states considered.

Suggested Citation

  • Kontek, Krzysztof, 2016. "A critical note on Salience Theory of choice under risk," Economics Letters, Elsevier, vol. 149(C), pages 168-171.
  • Handle: RePEc:eee:ecolet:v:149:y:2016:i:c:p:168-171
    DOI: 10.1016/j.econlet.2016.10.021
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    References listed on IDEAS

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    1. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2013. "Salience and Consumer Choice," Journal of Political Economy, University of Chicago Press, vol. 121(5), pages 803-843.
    2. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March.
    3. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2012. "Salience in Experimental Tests of the Endowment Effect," American Economic Review, American Economic Association, vol. 102(3), pages 47-52, May.
    4. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2013. "Salience and Asset Prices," American Economic Review, American Economic Association, vol. 103(3), pages 623-628, May.
    5. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    6. 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.
    7. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2015. "Salience Theory of Judicial Decisions," The Journal of Legal Studies, University of Chicago Press, vol. 44(S1), pages 7-33.
    8. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-1289, November.
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    Cited by:

    1. Dertwinkel-Kalt, Markus & Köster, Mats, 2017. "Local thinking and skewness preferences," DICE Discussion Papers 248, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    2. Markus Dertwinkel-Kalt & Mats Köster, 2018. "Salience and Skewness Preferences," CESifo Working Paper Series 7416, CESifo Group Munich.
    3. repec:eee:jeborg:v:157:y:2019:i:c:p:477-495 is not listed on IDEAS
    4. repec:jdm:journl:v:13:y:2018:i:6:p:587-606 is not listed on IDEAS
    5. Fabian Herweg & Daniel Müller, 2019. "Regret Theory and Salience Theory: Total Strangers, Distant Relatives or Close Cousins?," CESifo Working Paper Series 7445, CESifo Group Munich.
    6. Dertwinkel-Kalt, Markus & Köster, Mats, 2019. "Salience and Skewness Preferences," Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203492, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Models of decision-making under risk; Certainty equivalents; Marschak–Machina triangle; Indifference curves;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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