First Degree Stochastic Dominance Violations: Decision Weights and Bounded Rationality

Haim Levy

Economic Journal, 2008, vol. 118, issue 528, 759-774

Abstract: Expected Utility Theory, Rank Dependent Expected Utility and Cumulative Prospect Theory imply no First Degree Stochastic Dominance (FSD) violations. Prospect Theory and Configural Weight models either allow for FSD violation or even predict this phenomenon. I find experimentally that FSD violations are not significant, and hence conclude that they are due to bounded rationality rather than to a systematic and predictable effect. Moreover, the more transparent the FSD, the less violations are observed, which supports the bounded rationality hypothesis. Therefore, based on the FSD violations observed in my experiments, the above three paradigms cannot be rejected.

Date: 2008
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