RISK-AVERSION: MATHEMATICAL AND ECONOMIC PERSPECTIVES

Haim Levy
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Haim Levy: The Hebrew University of Jerusalem, Israel2University of Florida, Gainesville, FL, USA

Annals of Financial Economics (AFE), 2022, vol. 17, issue 02, 1-23

Abstract: A necessary condition for a dominance of prospect F over prospect G by all commonly employed investment criteria is EF(x)≥EG(x). Because of this requirement, optimal investment rules fail to distinguish between two alternative prospects where in practice one prospect is preferred over the other by all investors — a paradoxical result. We suggest the general almost second-degree stochastic dominance rule (GASSD) that relaxes this necessary condition, resolves the existing paradoxes and distinguishes between mathematically and economically relevant preferences. In the comparison of stocks and bonds for various horizons, the GASSD rule does not support the idiom “stocks for the long run†.

Keywords: Second-degree stochastic dominance (SSD); almost SSD (ASSD); general ASSD (GASSD); economically irrelevant preferences (EIP); economically relevant preferences (ERP); “stocks for the long run†(search for similar items in EconPapers)
Date: 2022
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DOI: 10.1142/S2010495222500117

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