Apportioning of Risks via Stochastic Dominance

Louis Eeckhoudt, Harris Schlesinger and Ilia Tsetlin

No 2467, CESifo Working Paper Series from CESifo

Abstract: Consider a simple two-state risk with equal probabilities for the two states. In particular, assume that the random wealth variable Xi dominates Yi via ith-order stochastic dominance for i = M,N. We show that the 50-50 lottery [XN + YM, YN + XM] dominates the lottery [XN + XM, YN + YM] via (N + M)th-order stochastic dominance. The basic idea is that a decision maker exhibiting (N + M)th-order stochastic dominance preference will allocate the state-contingent lotteries in such a way as not to group the two "bad" lotteries in the same state, where "bad" is defined via ith-order stochastic dominance. In this way, we can extend and generalize existing results about risk attitudes. This lottery preference includes behavior exhibiting higher order risk effects, such as precautionary effects and tempering effects.

Keywords: downside risk; precautionary effects; prudence; risk apportionment; risk aversion; stochastic dominance; temperance (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Apportioning of risks via stochastic dominance (2009)
Working Paper: Apportioning of risks via stochastic dominance (2009)
Working Paper: Apportioning of risks via stochastic dominance (2009)
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