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Economically relevant preferences for all observed epsilon

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  • Haim Levy
  • Moshe Leshno
  • Boaz Leibovitch

Abstract

The common investment decision rules, Markowitz’s Mean-Variance (MV) rule and the non-parametric Stochastic Dominance (SD) rules, suffer from one severe drawback: there are pairs of prospects where experimentally 100% of the subjects choose one prospect, yet these rules are unable to rank the two prospects—a paradoxical result. Thus, the set of all preferences corresponding to these decision rules is too large, because it contains theoretical preferences that are not encountered in practice. Based on 400 subjects’ choices we define the economically relevant set of preference and the corresponding new decision rules, which avoid the paradoxical results. The results are very robust and are almost unaffected by the magnitude of the outcomes and the structure of the prospects under consideration. Copyright Springer Science+Business Media, LLC 2010

Suggested Citation

  • Haim Levy & Moshe Leshno & Boaz Leibovitch, 2010. "Economically relevant preferences for all observed epsilon," Annals of Operations Research, Springer, vol. 176(1), pages 153-178, April.
    • Handle: RePEc:spr:annopr:v:176:y:2010:i:1:p:153-178:10.1007/s10479-008-0470-7
    DOI: 10.1007/s10479-008-0470-7
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