Skewness Seeking: Risk Loving, Optimism or Overweighting of Small Probabilities?

Thomas Åstebro, José Mata, Luís Santos-Pinto*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

In a controlled laboratory experiment we use one sample of college students and one of mature executives to investigate how positive skew influences risky choices. In reduced-form regressions we find that both students and executives make riskier choices when lotteries display positive skew. We estimate decision models to explore three explanations for skew seeking choices: risk-loving (convex utility), optimism (concave probability weighting) and likelihood insensitivity (inverse s-shape probability weighting). We find no role for love for risk as neither students nor executives have convex utility. Both optimism and likelihood insensitivity play a part in skew seeking choices. Likelihood insensitivity is larger for students than for executives. Executives have more concave utility and are more optimistic than students, but this is found to be largely due to them being older.
Original languageEnglish
JournalTheory and Decision
Volume78
Issue number2
Pages (from-to)189-208
Number of pages20
ISSN0040-5833
DOIs
Publication statusPublished - Feb 2015
Externally publishedYes

Keywords

  • Decision making under risk
  • Skew
  • Laboratory experiment

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