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An econometric analysis of salience theory

Balcombe, K., Fraser, I. and Sharma, A. (2020) An econometric analysis of salience theory. Bulletin of Economic Research. ISSN 1467-8586 (In Press)

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Abstract/Summary

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
Refereed:Yes
Divisions:Faculty of Life Sciences > School of Agriculture, Policy and Development > Economic and Social Sciences Division > Food Economics and Marketing (FEM)
ID Code:92578
Publisher:Blackwell Publishing

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