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An Econometric Analysis of Salience Theory

Kelvin, Balcombe, Iain, Fraser, Abhijit, Sharma (2021) An Econometric Analysis of Salience Theory. Bulletin of Economic Research, . ISSN 0307-3378. (doi:10.1111/boer.12264) (KAR id:82713)

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In this paper, we econometrically examine the performance of Salience Theory (ST) for explaining observed behavior outside of a fully defined state contingent setting. Using a well known data set, we find that only a minority of people act consistently in the way proposed by ST when confronted with lottery choices for which only marginal probabilities are presented. By estimating the implied dependence structure of payoffs consistent with ST, only a minority of people infer independent payoffs when attaching probabilities to states, a finding at odds with ST. Instead, a majority treat lotteries as having positively correlated payoffs which raises questions about the independence assumption in ST. Finally, we also find that ST explains choice behaviour less consistently than Expected Utility. Thus, ST should not be assumed to be superior to the most prominent models within the literature when employed outside of particular contexts.

Item Type: Article
DOI/Identification number: 10.1111/boer.12264
Uncontrolled keywords: Salience Theory, choice under risk, expected utility
Subjects: H Social Sciences > HB Economic Theory
Divisions: Divisions > Division of Human and Social Sciences > School of Economics
Depositing User: Iain Fraser
Date Deposited: 01 Sep 2020 09:23 UTC
Last Modified: 12 Jan 2023 00:00 UTC
Resource URI: (The current URI for this page, for reference purposes)
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