Nonmonotonic risk preferences over lottery comparison

Hongwei Bi and Wei Zhu

European Journal of Operational Research, 2022, vol. 303, issue 3, 1458-1468

Abstract: This paper provides a novel characterization of decision makers’ nonmonotonic risk preferences beyond risk aversion, prudence, temperance, etc. Specifically, it establishes a framework that uses decision-makers’ choices between binary lotteries to characterize their nonmonotonic risk preferences. This framework extends the seminal work of Eeckhoudt and Schlesinger [Eeckhoudt, L. and H. Schlesinger, 2006, Putting risk in its proper place, American Economic Review, 96(1): 280–289]. We further demonstrate the close relationships between the characterized nonmonotonic risk preferences and the non-integer stochastic dominance (and the related almost stochastic dominance), and propose non-integer stochastic dominance between the second- and third-order stochastic dominances and a new type of almost stochastic dominance. Moreover, we show that the framework provides a method to experimentally elicit decision makers’ nonmonotonic risk preferences.

Keywords: Risk preference; Stochastic dominance; Lottery (search for similar items in EconPapers)
JEL-codes: D11 D82 D91 G22 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:303:y:2022:i:3:p:1458-1468

DOI: 10.1016/j.ejor.2022.03.035

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