Stochastic dominance, risk and disappointment: a synthesis

Thierry Chauveau (chauveau@univ-paris1.fr)
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Thierry Chauveau: Centre d'Economie de la Sorbonne, https://centredeconomiesorbonne.univ-paris1.fr

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: Although it is endowed with many interesting properties, the theory of decision-making under risk by Loomes and Sugden [1986] has never been given an axiomatics. In this paper, we make up for this omission because their lottery-dependent functional is endowed with many interesting properties to which little attention has been paid up to now. In particular, investors whose preferences are represented by the functional are rational in that (a) they actually behave differently if they are risk averse or risk prone, (b) risk is defined in a consistent way with risk aversion, (c) the functional is but the opposite to a convex measure of risk (Föllmer ans Schied [2002]) when constant marginal utility is assumed and (d) violations of the second-order stochastic dominance property are allowed for when "utils" are substituted for monetary values. Moreover, the partial weak order induced by stochastic dominance over utils is as "close" to the weak order of preferences as possible and utility functions may be elicited through experimental testing

Keywords: Disappointment; risk-aversion; expected utility; risk premium; stochastic dominance; subjective risk (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2014-06
New Economics Papers: this item is included in nep-mic and nep-upt
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