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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, President and Fellows of Harvard College, 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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    Citations

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    Cited by:

    1. Dertwinkel-Kalt, Markus & Köster, Mats, 2017. "Local thinking and skewness preferences," DICE Discussion Papers 248, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    2. Markus Dertwinkel-Kalt & Mats Köster, 2020. "Salience and Skewness Preferences [Risk-neutral Firms can Extract Unbounded Profits from Consumers with Prospect Theory Preferences]," Journal of the European Economic Association, European Economic Association, vol. 18(5), pages 2057-2107.
    3. Königsheim, C. & Lukas, M. & Nöth, M., 2019. "Salience theory: Calibration and heterogeneity in probability distortion," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 477-495.
    4. R. Emre Aytimur, 2023. "Salience and horizontal differentiation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(1), pages 60-86, February.
    5. Krzysztof Kontek, 2018. "Boundary effects in the Marschak-Machina triangle," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 13(6), pages 587-606, November.
    6. Wang, Di, 2021. "Attention-driven probability weighting," Economics Letters, Elsevier, vol. 203(C).
    7. Fabio Römeis & Fabian Herweg & Daniel Müller, 2022. "Salience Bias and Overwork," Games, MDPI, vol. 13(1), pages 1-22, January.
    8. Herweg, Fabian & Müller, Daniel, 2021. "A comparison of regret theory and salience theory for decisions under risk," Journal of Economic Theory, Elsevier, vol. 193(C).
    9. Xiangfeng Ji & Xiaoyu Ao, 2021. "Travelers’ Bi-Attribute Decision Making on the Risky Mode Choice with Flow-Dependent Salience Theory," Sustainability, MDPI, vol. 13(7), pages 1-24, April.
    10. Bakó, Barna & Neszveda, Gábor, 2020. "The Achilles’ heel of Salience theory and a way to fix it," Economics Letters, Elsevier, vol. 193(C).
    11. Kelvin Balcombe & Iain Fraser & Abhijit Sharma, 2021. "An econometric analysis of salience theory," Bulletin of Economic Research, Wiley Blackwell, vol. 73(4), pages 545-554, October.
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    13. Qinghui Xu & Xiangfeng Ji, 2020. "User Equilibrium Analysis Considering Travelers’ Context-Dependent Route Choice Behavior on the Risky Traffic Network," Sustainability, MDPI, vol. 12(17), pages 1-25, August.

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    More about this item

    Keywords

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

    JEL classification:

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

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