Stochastic Dominance Analysis without the Independence Axiom

Simone Cerreia-Vioglio, Fabio Maccheroni and Massimo Marinacci

No 549, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

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. JEL classification: D81 Keywords: Stochastic dominance, integral stochastic orders, nonexpected utility, risk aversion, multi-utility representation, prospect theory, choice-acclimating personal equilibria

Date: 2015
New Economics Papers: this item is included in nep-mic, nep-ore and nep-upt
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Journal Article: Stochastic Dominance Analysis Without the Independence Axiom (2017)
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