Preferences for skewness: evidence from a binary choice experiment

Brünner, Tobias and Levínský, René and Qiu, Jianying (2011) Preferences for skewness: evidence from a binary choice experiment. The European Journal of Finance, 17 (7). pp. 525-538. ISSN 1351-847X

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Abstract

In this paper, we experimentally test skewness preferences at the individual level. Several prospects that can be ordered with respect to the third-degree stochastic dominance criterion are ranked by the participants of the experiment. We find that the skewness of a distribution has a significant impact on the decisions. Yet, while skewness has an impact, its direction differs substantially across subjects: 39% of our subjects demonstrate a statistically significant preference for skewness and 10% seem to avoid skewness (at 5% level). On the level of individual decisions we find that the variances of the prospects and subjects’ experience increase the probability of choosing the lottery with greater skewness.

Keywords:Skewness, Stochastic dominance, Decision-making under uncertainty
Subjects:N Business and Administrative studies > N300 Finance
L Social studies > L120 Microeconomics
L Social studies > L100 Economics
L Social studies > L111 Financial Economics
Divisions:Lincoln International Business School
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ID Code:18584
Deposited On:10 Sep 2015 16:02

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