Experimental Economics Seminar - Mats Köster

Title: Optimal Stopping in a Dynamic Salience Model

Abstract: While most puzzles in static choices under risk can be explained by a preference for positive and an aversion towards negative skewness, little is known about the implications of such skewness preferences for decision making in dynamic problems. We theoretically and experimentally analyze the implications of skewness preferences, as predicted by salience theory of choice under risk, for optimal stopping problems. We find strong support for all salience-based predictions in a laboratory experiment, and we document a positive relationship between skewness preferences revealed in static and dynamic decisions. From that we conclude that the static salience model—unlike (static) cumulative prospect theory—can be reasonably applied to dynamic decision problems.