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Risk-Aversion: Mathematical And Economic Perspectives

Author

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  • HAIM LEVY

    (The Hebrew University of Jerusalem, Israel2University of Florida, Gainesville, FL, USA)

Abstract

A necessary condition for a dominance of prospect F over prospect G by all commonly employed investment criteria is EF(x)≥EG(x). Because of this requirement, optimal investment rules fail to distinguish between two alternative prospects where in practice one prospect is preferred over the other by all investors — a paradoxical result. We suggest the general almost second-degree stochastic dominance rule (GASSD) that relaxes this necessary condition, resolves the existing paradoxes and distinguishes between mathematically and economically relevant preferences. In the comparison of stocks and bonds for various horizons, the GASSD rule does not support the idiom “stocks for the long run†.

Suggested Citation

  • Haim Levy, 2022. "Risk-Aversion: Mathematical And Economic Perspectives," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 17(02), pages 1-23, June.
    • Handle: RePEc:wsi:afexxx:v:17:y:2022:i:02:n:s2010495222500117
    DOI: 10.1142/S2010495222500117
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