An econometric analysis of salience theory

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

Research output: Contribution to journalArticlepeer-review

Abstract

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 dataset, 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 raise questions about the independence assumption in ST. Finally, we also find that ST explains choice behavior 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
Number of pages10
JournalBulletin of Economic Research
Early online date13 Jan 2021
DOIs
Publication statusE-pub ahead of print - 13 Jan 2021

Fingerprint

Dive into the research topics of 'An econometric analysis of salience theory'. Together they form a unique fingerprint.

Cite this