Apportioning of risks via stochastic dominance

Louis Eeckhoudt, Harris Schlesinger and Ilia Tsetlin

Journal of Economic Theory, 2009, vol. 144, issue 3, pages 994-1003

Abstract: Consider a simple two-state risk with equal probabilities for the two states. In particular, assume that the random wealth variable dominates via ith-order stochastic dominance for i=M,N. We show that the 50-50 lottery dominates the lottery via (N+M)th-order stochastic dominance. The basic idea is that a decision maker exhibiting (N+M)th-order stochastic dominance preference will allocate the state-contingent lotteries in such a way as not to group the two "bad" lotteries in the same state, where "bad" is defined via ith-order stochastic dominance. In this way, we can extend and generalize existing results about risk attitudes. This lottery preference includes behavior exhibiting higher-order risk effects, such as precautionary effects and tempering effects.

Keywords: Downside; risk; Precautionary; effects; Prudence; Risk; apportionment; Risk; aversion; Stochastic; dominance; Temperance (search for similar items in EconPapers)
Date: 2009

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Related works:
Working Paper: Apportioning of Risks via Stochastic Dominance (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:eee:jetheo:v:144:y:2009:i:3:p:994-1003

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