The Role of Salience in Choice under Risk: An Experimental Investigation

60 Pages Posted: 12 May 2016 Last revised: 16 Nov 2018

See all articles by Cary Frydman

Cary Frydman

University of Southern California - Marshall School of Business

Milica Milosavljevic Mormann

Southern Methodist University (SMU) - Marketing Department

Date Written: November 15, 2018

Abstract

Salience theory proposes that attention is drawn towards salient payoffs, which are then overweighed and distort the decision maker’s perception of a lottery. Across two experiments, we test this theory by manipulating the perception of a payoff through two distinct channels. In our first experiment, we vary the correlation between lotteries and find that the proportion of subjects exhibiting the Allais paradox triples. In our second experiment, we manipulate the perception of a payoff through a phantom lottery, which subjects can see, but they cannot choose. Theoretically, this generates a shift in the valuation of available lotteries. Consistent with this prediction, we find a substantial increase in the Allais paradox. Neither of our perceptual manipulations affects the predictions of expected utility or cumulative prospect theory. Salience theory offers a coherent framework to understand the observed malleability of the Allais paradox, and more generally, the effects of perception on risky choice.

Keywords: Salience, Attention, Allais paradox, Perception, Decoy effect, Phantom Alternative, Decision-Making under Risk

JEL Classification: C91, D81, D87

Suggested Citation

Frydman, Cary and Mormann, Milica Milosavljevic, The Role of Salience in Choice under Risk: An Experimental Investigation (November 15, 2018). Available at SSRN: https://ssrn.com/abstract=2778822 or http://dx.doi.org/10.2139/ssrn.2778822

Cary Frydman (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Milica Milosavljevic Mormann

Southern Methodist University (SMU) - Marketing Department ( email )

United States

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