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Comparison of the valuations of alternatives based on cumulative prospect theory and almost stochastic dominance

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  • Ewa Michalska
  • Renata Dudzińska-Baryła

Abstract

There are commonly accepted and objective decision rules, which are consistent with rationality, for example stochastic dominance rules. But, as can be seen in many research studies in behavioral economics, decision makers do not always act rationally. Rules based on cumulative prospect theory or almost stochastic dominance are relatively new tools which model real choices. Both approaches take into account some behavioral factors. The aim of this paper is to check the consistency of orders of the valuations of random alternatives based on these behavioral rules. The order of the alternatives is generated by a preference relation over the decision set. In this paper, we show that the methodology for creating rankings based on total orders can be used for the preference relations considered, because they enable comparison of all the elements in a set of random alternatives. For almost second degree stochastic dominance, this is possible due to its particular properties, which stochastic dominance does not possess.

Suggested Citation

  • Ewa Michalska & Renata Dudzińska-Baryła, 2012. "Comparison of the valuations of alternatives based on cumulative prospect theory and almost stochastic dominance," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 22(3), pages 23-36.
  • Handle: RePEc:wut:journl:v:3:y:2012:p:23-36:id:1042
    DOI: 10.5277/ord120302
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    References listed on IDEAS

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    Cited by:

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