Stochastic dominance, risk and disappointment: a synthesis

Thierry Chauveau ()
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Thierry Chauveau: Centre d'Economie de la Sorbonne, https://centredeconomiesorbonne.univ-paris1.fr

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: The theory of disappointment of Loomrs and Sugden [1986] has never been given an axiomatics. This article, where a theory of disappointment is derived from a simple axiomatics, makes up for this omission. The new theory is close to that of Loomes and Sugden although the functional representing the preferences of the decision-maker is now lottery-dependent. Actually, preferences exhibit four properties of interest: (a) risk-averse and risk prone investors actually behave differently; (b) risk is defined in a consistent way with risk aversion; (c) the functional is nothing but the opposite to a convex measure of risk (Föllmer and Schied [2002]) when constant marginal utility is assumed and (d) violations of the second-order stochastic dominance property are allowed for when monetary values are taken into account (but not when "utils" are substituted for them). Moreover, the preorder induced by stochastic dominance over utils is as "close" to the preorder of preferences as possible and utility functions may be elicited through experimental testing

Keywords: Disappointment; risk-aversion; expected utility; risk premium; stochastic dominance; subjective risk (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2014-06, Revised 2015-07
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:14054r

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