Skewed Noise

43 Pages Posted: 27 Nov 2013

See all articles by David Dillenberger

David Dillenberger

University of Pennsylvania - Department of Economics

Uzi Segal

Boston College - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 25, 2013

Abstract

Experimental evidence suggests that individuals who face an asymmetric distribution over the likelihood of a specific event might actually prefer not to know the exact value of this probability. We address these findings by studying a decision maker who has recursive, non-expected utility preferences over two-stage lotteries. For a binary lottery that yields the better outcome with probability p, we identify noise around p with a compound lottery that induces a probability distribution over the exact value of the probability and has an average value p. We first propose and characterize a new notion of skewed distributions. We then use this result to provide conditions under which a decision maker who always rejects symmetric noise around p will always reject skewed to the left noise, but might accept skewed to the right noise. The model can be applied to the areas of investment under risk, medical decision making, and criminal law procedures, and can also be used to address the phenomenon of ambiguity seeking in the context of decision making under uncertainty.

Keywords: asymmetric noise, skewed distributions, recursive non-expected utility, ambiguity seeking, compound lotteries.

JEL Classification: D81

Suggested Citation

Dillenberger, David and Segal, Uzi, Skewed Noise (November 25, 2013). PIER Working Paper No. 13-066. Available at SSRN: https://ssrn.com/abstract=2359526 or http://dx.doi.org/10.2139/ssrn.2359526

David Dillenberger (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-1503 (Phone)

Uzi Segal

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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