On Skewed Risks in Economic Models and Experiments
28 Pages Posted: 21 Nov 2011 Last revised: 31 Jul 2014
Date Written: Jult 31, 2014
Many of the most significant risks that people face in their lives are left-skewed, i.e., imply large losses with only small probability. I characterize skewness in binary risks, which are widely applied in both economic models and experiments. Moreover, I provide an explicit re-parametrization of binary risks in terms of their first three moments. These results allow for conducting clean comparative statics analysis with respect to skewness, and provide a useful tool for the calibration of lotteries in experiments. I apply them to show that left-skewed background risks give rise to a very strong precautionary saving motive, as well as to collect additional laboratory evidence on skewness preference and risk-seeking behavior.
Keywords: Binary Risks, Decision Making under Risk, Lottery Experiments, Skewness, Skewness Preference
JEL Classification: C81, C90, D81
Suggested Citation: Suggested Citation