An Econometric Analysis of Salience Theory

Kelvin G. Balcombe, Iain M. Fraser, Abhijit Sharma

Research output: Contribution to journalArticle

Abstract

In this paper, we econometrically examine the performance of Salience Theory (ST) for explaining observed behaviour 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 pro- posed 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.
Original languageEnglish
JournalBulletin of Economic Research
Publication statusAccepted/In press - 31 Aug 2020

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