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Preferred by "All" and Preferred by "Most" Decision Makers: Almost Stochastic Dominance

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Author Info

  • Moshe Leshno

    () (School of Business Administration, The Hebrew University of Jerusalem, Jerusalem 91905, Israel)

  • Haim Levy

    () (School of Business Administration, The Hebrew University of Jerusalem, Jerusalem 91905, Israel)

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    Abstract

    While "most" decision makers may prefer one uncertain prospect over another, stochastic dominance rules as well as other investment criteria, will not reveal this preference due to some extreme utility functions in the case of even a very small violation of these rules. Such strict rules relate to "all" utility functions in a given class including extreme ones which presumably rarely represents investors' preference. In this paper we establish almost stochastic dominance (ASD) rules which formally reveal a preference for "most" decision makers, but not for "all" of them. The ASD rules reveal that choices which probably conform with "most" decision makers also solve some debates, e.g., showing, as practitioners claim, an ASD preference for a higher proportion of stocks in the portfolio as the investment horizon increases, a conclusion which is not implied by the well-known stochastic dominance rules.

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    File URL: http://dx.doi.org/10.1287/mnsc.48.8.1074.169
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 48 (2002)
    Issue (Month): 8 (August)
    Pages: 1074-1085

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    Handle: RePEc:inm:ormnsc:v:48:y:2002:i:8:p:1074-1085

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    Related research

    Keywords: stochastic dominance; almost stochastic dominance; mean-variance; risk aversion;

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    Cited by:
    1. Mishra, Vinod & Smyth, Russell, 2010. "An examination of the impact of India's performance in one-day cricket internationals on the Indian stock market," Pacific-Basin Finance Journal, Elsevier, vol. 18(3), pages 319-334, June.
    2. Levy, Moshe, 2009. "Almost Stochastic Dominance and stocks for the long run," European Journal of Operational Research, Elsevier, vol. 194(1), pages 250-257, April.
    3. Bali, Turan G. & Demirtas, K. Ozgur & Levy, Haim & Wolf, Avner, 2009. "Bonds versus stocks: Investors' age and risk taking," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 817-830, September.
    4. Michael E. Drew & Anup Basu & Alistair Byrnes, 2009. "Dynamic Lifecycle Strategies for Target Date Retirement Funds," Discussion Papers in Finance finance:200902, Griffith University, Department of Accounting, Finance and Economics.
    5. Manfred Gilli & Enrico Schumann, 2009. "Optimal enough?," Working Papers 010, COMISEF.

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