Salience Theory of Choice Under Risk
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CitationBordalo, Pedro, Nicola Gennaioli, Andrei Shleifer. 2012. Salience theory of choice under risk. Quarterly Journal of Economics 127(3): 1243-1285.
AbstractWe 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.
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