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Stochastic Dominance and Prospect Dominance with Subjective Weighting Functions

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Author Info
Levy, Haim
Wiener, Zvi

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Abstract

Laboratory experiments with and without real money repeatedly reveal that even if all subjects observe the same pair of cumulative distributions F and G, they act as if they were other cumulative probability functions F* and G* different for different investors. Namely, the subjects assign (subjective) weights to the various probabilities. In their breakthrough article Kahneman and Tversky (1979) suggest that in making decisions under uncertainty, the subjects apply a monotonic transformation pi(p) where p are the probabilities, and investors make decisions by comparing pi(p) corresponding to the two distributions under consideration rather than by comparing the true probabilities, p, themselves. Copyright 1998 by Kluwer Academic Publishers

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Publisher Info
Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 16 (1998)
Issue (Month): 2 (May-June)
Pages: 147-63
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Handle: RePEc:kap:jrisku:v:16:y:1998:i:2:p:147-63

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  1. Gordon Anderson, 2004. "Making inferences about the polarization, welfare and poverty of nations: a study of 101 countries 1970-1995," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(5), pages 537-550. [Downloadable!]
  2. Richard Horan, 2001. "Cost-Effective and Stochastic Dominance Approaches to Stochastic Pollution Control," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 18(4), pages 373-389, April. [Downloadable!] (restricted)
  3. W. Wong & R. Chan, 2008. "Prospect and Markowitz stochastic dominance," Annals of Finance, Springer, vol. 4(1), pages 105-129, January. [Downloadable!] (restricted)
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  4. Oliver Linton & Esfandiar Maasoumi & Whang, Yoon-Jae, 2002. "Consistent Testing for Stochastic Dominance: A Subsampling Approach," Cowles Foundation Discussion Papers 1356, Cowles Foundation, Yale University, revised Mar 2002. [Downloadable!]
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  5. Thierry Post & Haim Levy, 2002. "Does Risk Seeking drive Asset Prices?," Tinbergen Institute Discussion Papers 02-070/2, Tinbergen Institute. [Downloadable!]
  6. Wing-Keung Wong & Chenghu Ma, 2005. "Preferences over Meyer’s Location-Scale Family," Departmental Working Papers wp0506, National University of Singapore, Department of Economics. [Downloadable!]
  7. Anderson, Anders E. S., 2004. "One for the Gain, Three for the Loss," SIFR Research Report Series 20, Institute for Financial Research. [Downloadable!]
  8. Wing-Keung Wong & Chenghu Ma, 2008. "Preferences over location-scale family," Economic Theory, Springer, vol. 37(1), pages 119-146, October. [Downloadable!] (restricted)
  9. Post, G.T. & Levy, H., 2002. "Does Risk Seeking Drive Asset Prices? A stochastic dominance analysis of aggregate investor preferences," Research Paper ERS-2002-50-F&A Revision_, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
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