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Preferred by "All" and Preferred by "Most" Decision Makers: Almost Stochastic Dominance

Author

Listed:
  • Moshe Leshno

    () (School of Business Administration, The Hebrew University of Jerusalem, Jerusalem 91905, Israel)

  • Haim Levy

    () (School of Business Administration, The Hebrew University of Jerusalem, Jerusalem 91905, Israel)

Abstract

While "most" decision makers may prefer one uncertain prospect over another, stochastic dominance rules as well as other investment criteria, will not reveal this preference due to some extreme utility functions in the case of even a very small violation of these rules. Such strict rules relate to "all" utility functions in a given class including extreme ones which presumably rarely represents investors' preference. In this paper we establish almost stochastic dominance (ASD) rules which formally reveal a preference for "most" decision makers, but not for "all" of them. The ASD rules reveal that choices which probably conform with "most" decision makers also solve some debates, e.g., showing, as practitioners claim, an ASD preference for a higher proportion of stocks in the portfolio as the investment horizon increases, a conclusion which is not implied by the well-known stochastic dominance rules.

Suggested Citation

  • Moshe Leshno & Haim Levy, 2002. "Preferred by "All" and Preferred by "Most" Decision Makers: Almost Stochastic Dominance," Management Science, INFORMS, vol. 48(8), pages 1074-1085, August.
  • Handle: RePEc:inm:ormnsc:v:48:y:2002:i:8:p:1074-1085
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    File URL: http://dx.doi.org/10.1287/mnsc.48.8.1074.169
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    References listed on IDEAS

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    1. Meyer, Jack, 1977. "Choice among distributions," Journal of Economic Theory, Elsevier, vol. 14(2), pages 326-336, April.
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    4. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March.
    5. Hanoch, Giora & Levy, Haim, 1970. "Efficient Portfolio Selection with Quadratic and Cubic Utility," The Journal of Business, University of Chicago Press, vol. 43(2), pages 181-189, April.
    6. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    7. Haim Levy, 1992. "Stochastic Dominance and Expected Utility: Survey and Analysis," Management Science, INFORMS, vol. 38(4), pages 555-593, April.
    8. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    9. William J. Baumol, 1963. "An Expected Gain-Confidence Limit Criterion for Portfolio Selection," Management Science, INFORMS, vol. 10(1), pages 174-182, October.
    10. Haim Levy, 1996. "Investment diversification and investment specialization and the assumed holding period," Applied Mathematical Finance, Taylor & Francis Journals, vol. 3(2), pages 117-134.
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