Stochastic Dominance Tests for Decreasing Absolute Risk Aversion. I. Discrete Random Variables

R. G. Vickson
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R. G. Vickson: University of Waterloo

Management Science, 1975, vol. 21, issue 12, 1438-1446

Abstract: Stochastic dominance (SD) theory is concerned with orderings of random variables by classes of utility functions characterized solely in terms of general properties. This paper discusses a type of stochastic dominance, called DSD, which is denned by the utility functions having decreasing absolute risk-aversion. Necessary and sufficient conditions for DSD are presented for discrete random variables which, after the possible addition of points of zero probability, are concentrated on finitely many equally-spaced points. The problem is cast as a nonlinear program, which is solved through an efficient dynamic programming routine. Examples are presented to illustrate the increased effectiveness of DSD relative to previous types of stochastic dominance.

Date: 1975
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:21:y:1975:i:12:p:1438-1446

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