VGSF - WU Vienna - LC

Sebastian Ebert, Frankfurt School of Finance & Management

Campus WU D3.0.225 11:00 - 12:30

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Se­bastian Ebert from the Frank­furt School of Fin­ance & Man­age­mentto present his re­search pa­per.
Per­sonal Webpage

Pa­per

Skew­ness Pref­er­ences in Choice un­der Risk

Skew­ness pref­er­ences — pref­er­ences to­ward low-­prob­ab­il­ity, high-im­pact risks — were iden­ti­fied as cru­cial de­termin­ants of eco­nomic be­ha­vior. This pa­per provides a uni­fied ana­lysis of skew­ness pref­er­ences within lead­ing the­or­ies of choice un­der risk. We show that most the­or­ies im­ply skew­ness-seek­ing (i.e., more pos­it­ive skew­ness is bet­ter), which is con­sist­ent with em­pir­ical evid­ence. We fur­ther pro­pose a defin­i­tion of the im­port­ance of skew­ness — the order of skew­ness pref­er­ence — for a given the­ory. We find that skew­ness is of third-order im­port­ance within the ex­pec­ted util­ity (EU) model with com­monly used util­ity func­tions, but of first-order im­port­ance within most be­ha­vi­oral (non-EU) mod­els. Even when al­low­ing for ar­bit­rary in­creas­ing util­ity func­tions, we prove that EU can­not in­duce first-order skew­ness-seek­ing. This im­possib­il­ity res­ult shows that one must de­part from the EU paradigm if one be­lieves that skew­ness is of first-order im­port­ance in choice un­der risk.



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