15. Salience

Question 1

What is the recent economic literature about our attention?

Answer 1

Recent economic literature acknowledges that our attention is limited and predictively drawn to specific features of our environment: Bordalo et al (2012), Woodford (2012),… One prominent theory in this new strand of the literature is Salience Theory: eg. Bordalo et al (2012)

A novel, unified explanation of many empirical phenomena = eg frequent risk seeking behaviour, Allais paradox, and preferences for assets characterized by the possibility of high, salient payoffs.

Little evidence more directly identifies the significant of salience for risky choices.

Question 2

What was the experimental design?

Answer 2

The experiment was conducted via the internet using the Internet Panel of the Center of Experimental Economics. 1300 members of the panel were invited in November 2016, 473 finished the experiment.

Participants were given instructions and control questions before the start of the actual experiment.

The order in which the decision situations were presented to the participants was fully balanced = ordering effects excluded by design.

Question 3

What was Bernatzi and Thaler’s model?

Answer 3

Bernatzi and Thaler’s model of Prospect theory (PT): individuals in asset markets judge portfolios by their value, ignoring overall wealth levels (narrow framing). An effect from this version of PT has not been ruled out by our design, since e-m is not taken into account. To assess their model with our data, we modify the structural model and jointly estimate risk aversion (in the gain domain) and curvature of the decision weighting function Results suggest that our data is incosistent with prior estimates for their model: either subjects extremely underweight the probability of the good state or they are extremely risk averse.

Question 4

What is the conclusion on Salience?

Answer 4

Developed and run an experiment which allows to test for salience effects à la Bordalo in choices under risk. Evidence of a salience effect on risk taking independent of risk preference and probability weighting. Behaviour consistent with smooth version of BGS. Extension: using a structural estimation we jointly estimate risk and salience parameters (CARA and CRRA) and find that people are indeed ‘slightly risk averse’ and effected by salience = estimated salience effect independent of risk specification In preparation: experiment where subjects trade such loteries in a double auction.

Question 5

Who invented Salience theory?

Answer 5

• Bordalo, Gennaioli and Shleifer: economic consequences of the way salience captures attention.

Question 6

What are the psychophysical concepts of perception?

Answer 6

• Known as the Weber-Fechner law

1. Weber’s principle: dissimilarity between 2 stimuli magnitutes is determined by the ratio of the large magnitude to the low.
   
   • Example: difference between 11 and 10 is similar to difference 20 and 22.
2. Fechnerian sensitivity: Dminishing sensitivity to a given difference in stimuli magnitude.
   
   • Example: More sensititive to difference 11 and 10 than 16 and 15.

Question 7

What empirical phenomena can salience theory explain?

Answer 7

• Frequent risk-seeking behaviour
• Allais paradox
• Preferences for assets characterized by the possibility of high, salient payoffs.
• Little evidence more directly identifies the significant of salience for risky choices.

Question 8

Who made the experiment and what is their focus/contribution.

Answer 8

• Nielsen, Sebald (professor) and Sorensen
  
  • Design and run an experiment that tests for salience effects in choices under risk.