Skewness Preferences in Choice under Risk

15 Pages Posted: 26 Nov 2019 Last revised: 11 Aug 2021

See all articles by Sebastian Ebert

Sebastian Ebert

Heidelberg University; affiliation not provided to SSRN

Paul Karehnke

ESCP Business School

Date Written: August 10, 2021

Abstract

Skewness preferences—preferences toward low-probability, high-impact risks—are crucial determinants of economic behavior. This paper defines first- and higher-order skewness preferences and shows that the order of skewness preference captures the importance of skewness relative to mean and variance. While leading theories of choice under risk largely agree on the direction of skewness preference, they disagree on the order. In expected utility, skewness-seeking cannot be first-order—an impossibility result—which motivates the use of behavioral theories in economic modeling.

Keywords: risk preferences, downside risk aversion, prudence, skewness preferences, orders of skewness preferences

JEL Classification: D03, D81

Suggested Citation

Ebert, Sebastian and Ebert, Sebastian and Karehnke, Paul, Skewness Preferences in Choice under Risk (August 10, 2021). Available at SSRN: https://ssrn.com/abstract=3480519 or http://dx.doi.org/10.2139/ssrn.3480519

Sebastian Ebert (Contact Author)

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany
06221543443 (Phone)
69115 (Fax)

affiliation not provided to SSRN

Paul Karehnke

ESCP Business School ( email )

79 avenue de la République
75011
France

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