Skewness Preference: Specialized Knowledge, Preference for Lotteries, or Deviations from Rational Expectations Equilibriums?

54 Pages Posted: 24 Aug 2019 Last revised: 30 Sep 2019

Date Written: September 29, 2019

Abstract

Suppose Rational Expectations Equilibriums (REE) that are inferred at time t materialize at time t+1. This study provides formal theoretical and empirical evidence that performance effects of skewness preference simultaneously can be evidence for demonstrations of full rationality (expertise), or acceptance of gambles on huge payoffs that have low probabilities of occurrence (preference for lotteries). In presence of incidence of unanticipated realizations of market frictions, market imperfections, or behaviors of alternate economic agents that induce deviations, at time t+1, from REE that are inferred at time t, a strictly concave relation between performance and skewness preference is consistent with investor rationality. A novel result is the finding that skewness preference induces largest benefits for portfolio performance in context of portfolios that are indicative of presence of some specialized knowledge, but yet are relatively diversified. Totality of study findings demonstrates skewness preference is not necessarily evidence for behavioral biases, trade-offs with risk aversion, preference for lotteries, or irrational exuberance; show skewness preference can, in entirety be fully rational, yet in presence of deviations from REE, appear to be less than fully rational.

Keywords: Venture Capital, Skewness Preference, Portfolio Performance, Rational Expectations Equilibriums, Ability, Gambles

JEL Classification: G11, G14, G24, D53, D84

Suggested Citation

Obrimah, Oghenovo A., Skewness Preference: Specialized Knowledge, Preference for Lotteries, or Deviations from Rational Expectations Equilibriums? (September 29, 2019). Available at SSRN: https://ssrn.com/abstract=3441963 or http://dx.doi.org/10.2139/ssrn.3441963

Oghenovo A. Obrimah (Contact Author)

FISK University ( email )

1000 17th Ave N
Nashville, TN TN 37208-3051
United States
4049404990 (Phone)

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