On Skewed Risks in Economic Models and Experiments

28 Pages Posted: 21 Nov 2011 Last revised: 31 Jul 2014

Sebastian Ebert

Tilburg University

Date Written: Jult 31, 2014

Abstract

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

Ebert, Sebastian, On Skewed Risks in Economic Models and Experiments (Jult 31, 2014). Available at SSRN: https://ssrn.com/abstract=1962783 or http://dx.doi.org/10.2139/ssrn.1962783

Sebastian Ebert (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

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