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Categorical Salience Theory

Author

Listed:
  • Mark Schneider

    (The University of Alabama)

  • Cary Deck

    (The University of Alabama
    Economic Science Institute, Chapman University)

  • Patrick DeJarnette

    (Waseda University)

Abstract

Monetary lotteries are the overwhelmingly predominant tool for understanding decisions under risk. However, many real-world decisions concern multidimensional outcomes involving dierent goods. Recent studies have tested whether people treat multidimensional risky choices in the same manner as unidimensional monetary lotteries and found that choices over consumer goods are less risk-averse and more consistent with expected utility theory than choices over monetary lotteries. While these puzzling results cannot be explained by any standard model of decision making, we demonstrate that these ndings are predicted by a salience-based model of category-dependent preferences that also explains the classic anomalies for choices under risk. Additionally, we experimentally verify a novel prediction of this Categorical Salience Theory. We further demonstrate that our model can explain empirical puzzles in nancial markets, insurance markets, and principal agent settings, including behavior in a new portfolio choice experiment that is unexplained by expected utility theory or prospect theory.

Suggested Citation

  • Mark Schneider & Cary Deck & Patrick DeJarnette, 2020. "Categorical Salience Theory," Working Papers 20-07, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:20-07
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    File URL: https://digitalcommons.chapman.edu/esi_working_papers/301/
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    More about this item

    Keywords

    Salience; Categorization; Choice under Risk;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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