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Skewed Noise

Author

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  • David Dillenberger

    (Department of Economics, University of Pennsylvania)

  • Uzi Segal

    (Department of Economics, Boston College and Warwick Business School)

Abstract

We study the attitude of decision makers to skewed noise. For a binary lottery that yields the better outcome with probability $p$, we identify noise around $p$, with a compound lottery that induces a distribution over the exact value of the probability and has an average value p. We propose and characterize a new notion of skewed distributions, and use a recursive non-expected utility model to provide conditions under which rejection of symmetric noise implies rejection of skewed to the left noise as well. We demonstrate that rejection of these types of noises does not preclude acceptance of some skewed to the right noise, in agreement with recent experimental evidence. We apply the model to study random allocation problems (one-sided matching) and show that it can predict systematic preference for one allocation mechanism over the other, even if the two agree on the overall probability distribution over assignments. The model can also be used to address the phenomenon of ambiguity seeking in the context of decision making under uncertainty.

Suggested Citation

  • David Dillenberger & Uzi Segal, 2015. "Skewed Noise," PIER Working Paper Archive 15-015, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:15-015
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Skewed distributions; recursive non-expected utility; ambiguity seeking; one-sided matching;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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