Rolling the Skewed Die: Economic Foundations of the Demand for Skewness and Experimental Evidence
46 Pages Posted: 10 May 2018 Last revised: 17 Oct 2022
Date Written: October 2022
Skewness is pervasive across financial instruments, and it is well documented that many investors seek idiosyncratic skewness in their portfolios. Relative wealth concerns provide economic foundations for an aspirational utility function reminiscent of Friedman and Savage (1948) that we show leads to the optimal purchase of right- or left-skewed securities, even if they have non-positive expected payoff. Our analysis yields a rich set of implications broadly consistent with prior empirical observations and the results of a novel laboratory experiment we conducted. In this experiment, treatments differed by how much (the location) participants needed to earn in order to achieve an experimentally-induced aspirational good. We find evidence that, as the location of the aspirational good changed, participants sought more (positive or negative) skewness in their lottery choices, consistent with improving their chances of achieving that good.
Keywords: endogenous demand for skewness, utility function, aspiration, status
JEL Classification: G02, G11
Suggested Citation: Suggested Citation