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Probabilistic sophistication, second order stochastic dominance and uncertainty aversion

  • Cerreia-Vioglio, Simone
  • Maccheroni, Fabio
  • Marinacci, Massimo
  • Montrucchio, Luigi

We study the interplay of probabilistic sophistication, second order stochastic dominance and uncertainty aversion, three fundamental notions in choice under uncertainty. In particular, our main result, Theorem 2, characterizes uncertainty averse preferences that are probabilistically sophisticated, as well as uncertainty averse preferences that satisfy second order stochastic dominance. As a byproduct, Proposition 2 highlights a fundamental tension between probabilistic sophistication/second order stochastic dominance and uncertainty aversion in the presence of nontrivial unambiguous events.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304406812000390
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Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 48 (2012)
Issue (Month): 5 ()
Pages: 271-283

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Handle: RePEc:eee:mateco:v:48:y:2012:i:5:p:271-283
DOI: 10.1016/j.jmateco.2012.05.005
Contact details of provider: Web page: http://www.elsevier.com/locate/jmateco

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