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Bivariate Stochastic Dominance and Substitute Risk-(In)dependent Utilities

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  • Michel Denuit

    () (Institut de Statistique, Biostatistique et Sciences Actuarielles, Université Catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium)

  • Louis Eeckhoudt

    () (IÉSEG School of Management, Université Catholique de Lille, 59000 Lille, France; and Center for Operations Research and Econometrics, Université Catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium)

Abstract

In this paper, we show that, despite their rigid analytical form, substitute risk-independent utilities have a much wider applicability than expected. Our contribution extends that of Mosler (Mosler, K. C. 1984. Stochastic dominance decision rules when the attributes are utility independent. Management Sci. 30 (11) 1311--1322) by considering utility functions that exhibit properties beyond nonsatiation and risk aversion (e.g., prudence and temperance). By using the widespread idea of correlation aversion, substitute risk-independent utilities are shown to generate bivariate stochastic dominance. As an application, portfolios are compared to assess the possible hedging effect between two outcomes.

Suggested Citation

  • Michel Denuit & Louis Eeckhoudt, 2010. "Bivariate Stochastic Dominance and Substitute Risk-(In)dependent Utilities," Decision Analysis, INFORMS, vol. 7(3), pages 302-312, September.
  • Handle: RePEc:inm:ordeca:v:7:y:2010:i:3:p:302-312
    DOI: 10.1287/deca.1100.0179
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    File URL: http://dx.doi.org/10.1287/deca.1100.0179
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    References listed on IDEAS

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    Cited by:

    1. Dionne, Georges & Li, Jingyuan, 2014. "Comparative Ross risk aversion in the presence of mean dependent risks," Journal of Mathematical Economics, Elsevier, vol. 51(C), pages 128-135.
    2. Christoph Heinzel, 2014. "Term structure of discount rates under multivariate s-ordered consumption growth," Working Papers SMART - LERECO 14-01, INRAE UMR SMART-LERECO.
    3. Denuit, Michel M. & Mesfioui, Mhamed, 2017. "Preserving the Rothschild–Stiglitz type increase in risk with background risk: A characterization," Insurance: Mathematics and Economics, Elsevier, vol. 72(C), pages 1-5.
    4. Kenneth C. Lichtendahl & Raul O. Chao & Samuel E. Bodily, 2012. "Habit Formation from Correlation Aversion," Operations Research, INFORMS, vol. 60(3), pages 625-637, June.
    5. Georges Dionne & Jingyuan Li, 2012. "Comparative Ross Risk Aversion in the Presence of Quadrant Dependent Risks," Cahiers de recherche 1226, CIRPEE.
    6. L. Robin Keller, 2010. "From the Editor..," Decision Analysis, INFORMS, vol. 7(3), pages 235-237, September.
    7. L. Robin Keller, 2011. "From the Editor ---Multiattribute and Intertemporal Preferences, Probability, and Stochastic Processes: Models and Assessment," Decision Analysis, INFORMS, vol. 8(3), pages 165-169, September.
    8. Argyris, Nikolaos & French, Simon, 2017. "Nuclear emergency decision support: A behavioural OR perspective," European Journal of Operational Research, Elsevier, vol. 262(1), pages 180-193.

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