Stochastic Dominance Analysis Without the Independence Axiom

Simone Cerreia-Vioglio, Fabio Maccheroni () and Massimo Marinacci
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Fabio Maccheroni: Department of Decision Sciences and Innocenzo Gasparini Institute for Economic Research, Università Bocconi, Milano 20136, Italy

Management Science, 2017, vol. 63, issue 4, 1097-1109

Abstract: We characterize the consistency of a large class of nonexpected utility preferences (including mean-variance preferences and prospect theory preferences) with stochastic orders (for example, stochastic dominances of different degrees). Our characterization rests on a novel decision theoretic result that provides a behavioral interpretation of the set of all derivatives of the functional representing the decision maker’s preferences. As an illustration, we consider in some detail prospect theory and choice-acclimating preferences, two popular models of reference dependence under risk, and we show the incompatibility of loss aversion with prudence.

Keywords: stochastic dominance; integral stochastic orders; nonexpected utility; risk aversion; multiutility representation; prospect theory; choice-acclimating personal equilibria (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (9)

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https://doi.org/10.1287/mnsc.2015.2388 (application/pdf)

Related works:
Working Paper: Stochastic Dominance Analysis without the Independence Axiom (2015)
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