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Penny-picking refers to the often-observed phenomenon of repeatedly taking
negatively skewed risks and seems directly at odds with evidence on (positive-)skewness-seeking as observed in static settings. We show that penny-picking
may not only occur despite skewness-seeking, but—seemingly paradoxically—
because of skewness-seeking. With sufficient time available, risks with arbitrary
negative skewness can be gambled in such a way that, overall, skewness
is positive. Therefore, classical behavioral theories like prospect theory
straightforwardly explain penny-picking. More generally, we show that the
versatile dynamics of skewness reconcile apparent preference reversals concerning
the avoidance and acceptance of (skewed and non-skewed) risks.
Keywords: Skewness, horizon effects, probability weighting, rare events.
