Document Type

Article

Publication Date

2-15-2020

Abstract

Monetary lotteries are the overwhelmingly predominant tool for understanding decisions under risk. However, many real-world decisions concern multidimensional out- comes involving different goods. Recent studies have tested whether people treat multidimensional risky choices in the same manner as unidimensional monetary lotteries and found that choices over consumer goods are less risk-averse and more consistent with expected utility theory than choices over monetary lotteries. While these puzzling results cannot be explained by any standard model of decision making, we demonstrate that these findings are predicted by a salience-based model of category-dependent preferences that also explains the classic anomalies for choices under risk. Additionally, we experimentally verify a novel prediction of this Categorical Salience Theory. We further demonstrate that our model can explain empirical puzzles in financial markets, insurance markets, and principal agent settings, including behavior in a new portfolio choice experiment that is unexplained by expected utility theory or prospect theory.

Comments

ESI Working Paper 20-07

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