Salience Theory of Choice Under Risk
- 20 June 2012
- journal article
- Published by Oxford University Press (OUP) in The Quarterly Journal of Economics
- Vol. 127 (3), 1243-1285
- https://doi.org/10.1093/qje/qjs018
Abstract
We present a theory of choice among lotteries in which the decision maker's attention is drawn to (precisely defined) salient payoffs. This leads the decision maker to a context-dependent representation of lotteries in which true probabilities are replaced by decision weights distorted in favor of salient payoffs. By specifying decision weights as a function of payoffs, our model provides a novel and unified account of many empirical phenomena, including frequent risk-seeking behavior, invariance failures such as the Allais paradox, and preference reversals. It also yields new predictions, including some that distinguish it from prospect theory, which we test. JEL Codes: D03, D81.Keywords
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