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Apportioning of Risks via Stochastic Dominance

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  • Louis Eeckhoudt
  • Harris Schlesinger
  • Ilia Tsetlin

Abstract

Consider a simple two-state risk with equal probabilities for the two states. In particular, assume that the random wealth variable Xi dominates Yi via ith-order stochastic dominance for i = M,N. We show that the 50-50 lottery [XN + YM, YN + XM] dominates the lottery [XN + XM, YN + YM] via (N + M)th-order stochastic dominance. The basic idea is that a decision maker exhibiting (N + M)th-order stochastic dominance preference will allocate the state-contingent lotteries in such a way as not to group the two "bad" lotteries in the same state, where "bad" is defined via ith-order stochastic dominance. In this way, we can extend and generalize existing results about risk attitudes. This lottery preference includes behavior exhibiting higher order risk effects, such as precautionary effects and tempering effects.

Suggested Citation

  • Louis Eeckhoudt & Harris Schlesinger & Ilia Tsetlin, 2008. "Apportioning of Risks via Stochastic Dominance," CESifo Working Paper Series 2467, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_2467
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    File URL: https://www.cesifo-group.de/DocDL/cesifo1_wp2467.pdf
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    References listed on IDEAS

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    Cited by:

    1. Christophe Courbage & Henri Loubergé & Béatrice Rey, 2017. "On the properties of non-monetary measures for risks," Working Papers 1710, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.

    More about this item

    Keywords

    downside risk; precautionary effects; prudence; risk apportionment; risk aversion; stochastic dominance; temperance;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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