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Comparing Risks by Acceptance and Rejection

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  • Sergiu Hart

Abstract

Stochastic dominance is a partial order on risky assets (“gambles”) that is based on the uniform preference—of all decision-makers in an appropriate class—for one gamble over another. We modify this requirement, first, by taking into account the status quo (given by the current wealth) and the possibility of rejecting gambles, and second, by comparing rejections that are substantive (i.e., uniform over wealth levels or over utilities). This yields two new stochastic orders: “wealth-uniform dominance” and “utility-uniform dominance.” Unlike stochastic dominance, these two orders are complete: any two gambles can be compared. Moreover, they are equivalent to the orders induced by, respectively, the Aumann–Serrano index of riskiness and the Foster–Hart measure of riskiness.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/662222
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File URL: http://www.jstor.org/stable/full/10.1086/662222
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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 119 (2011)
Issue (Month): 4 ()
Pages: 617 - 638

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Handle: RePEc:ucp:jpolec:doi:10.1086/662222

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Web page: http://www.journals.uchicago.edu/JPE/

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Cited by:
  1. Chamorro Elosua, Arritokieta & Usategui Díaz de Otalora, José María, . "A Note on Risk Acceptance, Bankruptcy Avoidance and Riskiness Measures," DFAEII Working Papers DFAEII;2013-04, University of the Basque Country - Department of Foundations of Economic Analysis II.
  2. Antonio Cabrales & Olivier Gossner & Roberto Serrano, 2010. "Entropy and the value of information for investors," Levine's Working Paper Archive 661465000000000355, David K. Levine.
  3. Moti Michaeli, 2012. "Riskiness for sets of gambles," Discussion Paper Series dp603, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  4. Kadan, Ohad & Liu, Fang, 2014. "Performance evaluation with high moments and disaster risk," Journal of Financial Economics, Elsevier, vol. 113(1), pages 131-155.
  5. Amnon Schreiber, 2012. "An Economic Index of Relative Riskiness," Discussion Paper Series dp597, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  6. Schnytzer, Adi & Westreich, Sara, 2013. "A global index of riskiness," Economics Letters, Elsevier, vol. 118(3), pages 493-496.
  7. Frank Riedel & Tobias Hellmann, 2013. "The Foster-Hart Measure of Riskiness for General Gambles," Working Papers 474, Bielefeld University, Center for Mathematical Economics.
  8. Kent Smetters & Xingtan Zhang, 2013. "A Sharper Ratio: A General Measure for Correctly Ranking Non-Normal Investment Risks," NBER Working Papers 19500, National Bureau of Economic Research, Inc.
  9. Antonio Cabrales & Olivier Gossner & Roberto Serrano, 2012. "The Appeal of Information Transactions," Economics Working Papers we1224, Universidad Carlos III, Departamento de Economía.
  10. Hart, Sergiu & Foster, Dean P., 2013. "A wealth-requirement axiomatization of riskiness," Theoretical Economics, Econometric Society, vol. 8(2), May.
  11. Steven Kou & Xianhua Peng, 2014. "On the Measurement of Economic Tail Risk," Papers 1401.4787, arXiv.org, revised Feb 2014.
  12. repec:hal:wpaper:halshs-00648884 is not listed on IDEAS
  13. Menegatti, Mario, 2014. "New results on the relationship among risk aversion, prudence and temperance," European Journal of Operational Research, Elsevier, vol. 232(3), pages 613-617.

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