Impact of Presentation Format and Self-Reported Risk Aversion on Revealed Skewness Preferences

Vrecko Dennis, Klos Alexander, Langer Thomas


Abstract
This paper reports the results of an experiment on the revealed preference for skewness in a comparison of continuous return distributions. We find that revealed preferences are highly sensitive to the way asset risks are communicated. Whereas probability density functions lead to a pronounced preference for left-skewed distributions, the opposite is true for cumulative distribution functions. Systematic misperceptions of the variance cannot explain the sensitivity of preferences to the presentation format. Part of the preference for positive skewness when risks are communicated through probability density functions is due to a systematic misestimation of the expected return. We also find that self-reported risk aversion, a measure of risk attitude commonly used in practice, is a valuable predictor of skewness preferences. Individuals that judge themselves as more risk averse show a stronger preference for right skewness.

Keywords
decision analysis skewness preferences presentation formats self-reported risk aversion investment perception decisions prices choice



Publication type
Research article (journal)

Peer reviewed
Yes

Publication status
Published

Year
2009

Journal
DECISION ANALYSIS

Volume
6

Issue
2

Start page
57

End page
74

Language
English

ISSN
1545-8490