Advanced Search
MyIDEAS: Login to save this article or follow this journal

Modifying the Mean-Variance Approach to Avoid Violations of Stochastic Dominance

Contents:

Author Info

  • Pavlo R. Blavatskyy

    ()
    (Institute of Public Finance, University of Innsbruck, A-6020 Innsbruck, Austria)

Registered author(s):

    Abstract

    The mean-variance approach is an influential theory of decision under risk proposed by Markowitz (Markowitz, H. 1952. Portfolio selection. J. Finance 7(1) 77-91). The mean-variance approach implies violations of first-order stochastic dominance not commonly observed in the data. This paper proposes a new model in the spirit of the classical mean-variance approach without violations of stochastic dominance. The proposed model represents preferences by a functional U(L) - \rho \cdot r(L), where U(L) denotes the expected utility of lottery L, \rho \in [-1, 1] is a subjective constant, and r(L) is the mean absolute (utility) semideviation of lottery L. The model comprises a linear trade-off between expected utility and utility dispersion. The model can accommodate several behavioral regularities such as the Allais paradox and switching behavior in Samuelson's example.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://dx.doi.org/10.1287/mnsc.1100.1224
    Download Restriction: no

    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 56 (2010)
    Issue (Month): 11 (November)
    Pages: 2050-2057

    as in new window
    Handle: RePEc:inm:ormnsc:v:56:y:2010:i:11:p:2050-2057

    Contact details of provider:
    Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA
    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Email:
    Web page: http://www.informs.org/
    More information through EDIRC

    Related research

    Keywords: mean-variance approach; expected utility; risk; utility dispersion; decision theory;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Blavatskyy, Pavlo, 2013. "Which decision theory?," Economics Letters, Elsevier, vol. 120(1), pages 40-44.
    2. Blavatskyy, Pavlo R., 2012. "The Troika paradox," Economics Letters, Elsevier, vol. 115(2), pages 236-239.
    3. Post, Thierry & Kopa, MiloŇ°, 2013. "General linear formulations of stochastic dominance criteria," European Journal of Operational Research, Elsevier, vol. 230(2), pages 321-332.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:56:y:2010:i:11:p:2050-2057. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.