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Stochastic dominance, risk and disappointment: a synthesis

Thierry Chauveau ()
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Thierry Chauveau: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique

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Abstract: In this article, utilities are substituted for monetary values in the definition of second order stochastic dominance (SSD). Doing so yields a family of preorders induced by SSD among which one is the "closest" to the original preorder of preferences. The corresponding utility function is the most likely to be that of the decision maker. It may be defined before behavioural axioms are set. Theories of decision making under risk can then be restated in a more general and consistent way. As an example, a new theory of disappointment is developed, which is endowed with three important properties: (a) risk premia are invariant by translation, (b) when constant marginal utility is assumed, preferences are represented by a functional which is the opposite to a convex measure of risk and (c) the functional representing preferences and the utility function can be easily elicited through experimental testing.

Keywords: disappointment; risk-aversion; expected utility; risk premium; stochastic dominance; subjective risk; déception; aversion pour le risque; risque subjectif; prime de risque; utilité espérée (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-mic and nep-upt
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Published in 2016

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