Abstract

While  much  literature  has  focused  on  preferences  regarding  risk,  preferences  over skewness also have significant economic implications. An important and understudied aspect of skewness preferences is how they affect risk taking. In this paper, we design a novel laboratory  experiment that elicits certainty equivalents over lotteries where the variance and skewness of the  outcomes  are  orthogonal  to  each  other.  This  design  enables us  to  cleanly  measure  both skewness  seeking/avoiding  and  risk  taking  behavior,  and  their  interaction,  without  needing  to make parametric assumptions. Our experiment includes both left-and right-skewed lotteries. The results reveal that the majority of subjects are skewness avoiding  risk  takers  who correspondingly also take more risk when facing less skewed lotteries. Our second contribution is  to  link  these  choices  to  individual  rank-dependent  utility  preference  parameters  estimated using a separate lottery choice protocol. Using a latent-class model, we are able to identify two classes  of  subjects:  skewness  avoiders  with  the  classic  inverse s-shaped  probability  weighting function  and  skewness  neutral  subjects  that  do  not  distort  probabilities.  Our  results  thus demonstrate  the  link  between  probability  distortion  and  skewness  seeking/avoidance  choices. They also highlight the importance of accounting for individual heterogeneity.

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