Comparing Risks by Acceptance and Rejection
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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- Robert J. Aumann & Roberto Serrano, 2008.
"An Economic Index of Riskiness,"
Journal of Political Economy,
University of Chicago Press, vol. 116(5), pages 810-836, October.
- Robert J. Aumann & Roberto Serrano, 2006. "An Economic Index of Riskiness," Working Papers 2006-20, Brown University, Department of Economics.
- Robert J. Aumann & Roberto Serrano, 2007. "An economic index of riskiness," Working Papers 2007-08, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
- Robert J. Aumann & Roberto Serrano, 2006. "An Economic Index of Riskiness," Levine's Bibliography 321307000000000585, UCLA Department of Economics.
- Robert J. Aumann & Roberto Serrano, 2007. "An Economic Index of Riskiness," Discussion Paper Series dp446, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
- Robert J. Aumann & Roberto Serrano, 2007. "An Economic Index of Riskiness," Levine's Bibliography 321307000000000836, UCLA Department of Economics.
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