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

See all articles by Andreas Aristidou

Andreas Aristidou

affiliation not provided to SSRN

Aleksandar Giga

University of Southern California

Suk Lee

University of Southern California, Marshall School of Business

Fernando Zapatero

Questrom School of Business, Boston University

Date Written: October 2022

Abstract

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

Aristidou, Andreas and Giga, Aleksandar and Lee, Suk and Zapatero, Fernando, Rolling the Skewed Die: Economic Foundations of the Demand for Skewness and Experimental Evidence (October 2022). Boston University Questrom School of Business Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3168944 or http://dx.doi.org/10.2139/ssrn.3168944

Andreas Aristidou

affiliation not provided to SSRN

Aleksandar Giga

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Suk Lee

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

Los Angeles, CA
United States

Fernando Zapatero (Contact Author)

Questrom School of Business, Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-3631 (Phone)

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