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Stochastic Efficiency Analysis With Risk Aversion Bounds: A Simplified Approach

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  • Hardaker, J. Brian
  • Lien, Gudbrand D.

Abstract

A method of stochastic dominance analysis with respect to a function (SDRF) is described and illustrated. The method, called stochastic efficiency with respect to a function (SERF), partitions a set of risky alternatives in terms of certainty equivalents for a specified range of attitudes to risk. It can be applied for any utility function with risk attitudes defined by corresponding ranges of absolute, relative or partial risk aversion coefficients. SERF involves comparing each alternative with all the other alternatives simultaneously, not pairwise as with conventional SDRF. Hence it yields a subset of the efficient set found by SDRF. Moreover, the method is readily implemented in a simple spreadsheet with no special software needed.

Suggested Citation

  • Hardaker, J. Brian & Lien, Gudbrand D., 2003. "Stochastic Efficiency Analysis With Risk Aversion Bounds: A Simplified Approach," Working Papers 12954, University of New England, School of Economics.
    • Handle: RePEc:ags:uneewp:12954
    DOI: 10.22004/ag.econ.12954
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    References listed on IDEAS

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    2. Grove, Bennie & Nel, F. & Maluleke, H.H., 2006. "Stochastic efficiency analysis of alternative water conservation strategies," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 45(01), pages 1-10, March.
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    4. Grove, Bennie, 2006. "Stochastic efficiency optimisation of alternative agricultural water use strategies," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 45(4), pages 1-15, December.
    5. Gicheha, M.G. & Edwards, G.R. & Bell, S.T. & Burtt, E.S. & Bywater, A.C., 2014. "Embedded risk management in dryland sheep systems II. Risk analysis," Agricultural Systems, Elsevier, vol. 124(C), pages 1-11.

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