Skewness seeking: risk loving, optimism or overweighting of small probabilities?


Theory and Decision

February 2015, vol. 78, n°2, pp.189-208

Departments: Economics & Decision Sciences, GREGHEC (CNRS)

Keywords: Decision making under risk, Skew, Laboratory experiment

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