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Impact of Presentation Format and Self-Reported Risk Aversion on Revealed Skewness Preferences

Author

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  • Dennis Vrecko

    (Finance Center Münster, DIA Research Group for Retirement Savings, University of Münster, 48143 Münster, Germany)

  • Alexander Klos

    (Finance Center Münster, DIA Research Group for Retirement Savings, University of Münster, 48143 Münster, Germany)

  • Thomas Langer

    (Finance Center Münster, DIA Research Group for Retirement Savings, University of Münster, 48143 Münster, Germany)

Abstract

This paper reports the results of an experiment on the revealed preference for skewness in a comparison of continuous return distributions. We find that revealed preferences are highly sensitive to the way asset risks are communicated. Whereas probability density functions lead to a pronounced preference for left-skewed distributions, the opposite is true for cumulative distribution functions. Systematic misperceptions of the variance cannot explain the sensitivity of preferences to the presentation format. Part of the preference for positive skewness when risks are communicated through probability density functions is due to a systematic misestimation of the expected return. We also find that self-reported risk aversion, a measure of risk attitude commonly used in practice, is a valuable predictor of skewness preferences. Individuals that judge themselves as more risk averse show a stronger preference for right skewness.

Suggested Citation

  • Dennis Vrecko & Alexander Klos & Thomas Langer, 2009. "Impact of Presentation Format and Self-Reported Risk Aversion on Revealed Skewness Preferences," Decision Analysis, INFORMS, vol. 6(2), pages 57-74, June.
    • Handle: RePEc:inm:ordeca:v:6:y:2009:i:2:p:57-74
    DOI: 10.1287/deca.1090.0141
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    References listed on IDEAS

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    3. L. Robin Keller & Ali Abbas & J. Eric Bickel & Vicki M. Bier & David V. Budescu & John C. Butler & Enrico Diecidue & Robin L. Dillon-Merrill & Raimo P. Hämäläinen & Kenneth C. Lichtendahl & Jason R. W, 2012. "From the Editors ---Brainstorming, Multiplicative Utilities, Partial Information on Probabilities or Outcomes, and Regulatory Focus," Decision Analysis, INFORMS, vol. 9(4), pages 297-302, December.
    4. François Desmoulins-Lebeault & Luc Meunier, 2018. "Moment Risks: Investment for Self and for a Firm," Decision Analysis, INFORMS, vol. 15(4), pages 242-266, December.
    5. Matteo Benuzzi & Matteo Ploner, 2023. "Skewness-seeking behavior and financial investments," CEEL Working Papers 2301, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
    6. L. Robin Keller, 2010. "From the Editor..," Decision Analysis, INFORMS, vol. 7(3), pages 235-237, September.
    7. L. Robin Keller & Kelly M. Kophazi, 2009. "From the Editors..," Decision Analysis, INFORMS, vol. 6(2), pages 53-56, June.
    8. Nolte, Sven & Schneider, Judith C., 2018. "How price path characteristics shape investment behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 154(C), pages 33-59.
    9. Jeffrey M. Keisler & Patrick S. Noonan, 2012. "Communicating Analytic Results: A Tutorial for Decision Consultants," Decision Analysis, INFORMS, vol. 9(3), pages 274-292, September.
    10. Alen Nosić & Martin Weber, 2010. "How Riskily Do I Invest? The Role of Risk Attitudes, Risk Perceptions, and Overconfidence," Decision Analysis, INFORMS, vol. 7(3), pages 282-301, September.

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