Apportioning of Risks via Stochastic Dominance
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.
|Date of creation:||2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mao, James C T, 1970. "Survey of Capital Budgeting: Theory and Practice," Journal of Finance, American Finance Association, vol. 25(2), pages 349-60, May.
- Wing-Keung Wong, 2007.
"Stochastic Dominance and Mean-Variance Measures of Profit and Loss for Business Planning and Investment,"
Finance Working Papers
21922, East Asian Bureau of Economic Research.
- Wong, Wing-Keung, 2007. "Stochastic dominance and mean-variance measures of profit and loss for business planning and investment," European Journal of Operational Research, Elsevier, vol. 182(2), pages 829-843, October.
- Wing-Keung Wong, 2007. "Stochastic Dominance and Mean-Variance Measures of Profit and Loss for Business Planning and Investment," SCAPE Policy Research Working Paper Series 0705, National University of Singapore, Department of Economics, SCAPE.
- repec:hal:journl:hal-00283170 is not listed on IDEAS
- W. Henry Chiu, 2005. "Skewness Preference, Risk Aversion, and the Precedence Relations on Stochastic Changes," Management Science, INFORMS, vol. 51(12), pages 1816-1828, December.
- Alain Chateauneuf & Ghizlane Lakhnati & Eric Langlais, 2005.
"On the precautionary motive for savings and prudence, in an EU and a NEU framework,"
Cahiers de la Maison des Sciences Economiques
b05034, Université Panthéon-Sorbonne (Paris 1).
- Alain Chateauneuf & Ghizlane Lakhnati & Eric Langlais, 2005. "On the precautionary motive for savings and prudence, in an EU and a NEU framework," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00194667, HAL.
- Hanoch, G & Levy, Haim, 1969. "The Efficiency Analysis of Choices Involving Risk," Review of Economic Studies, Wiley Blackwell, vol. 36(107), pages 335-46, July.
- Louis Eeckhoudt & Béatrice Rey & Harris Schlesinger, 2006.
"A Good Sign for Multivariate Risk Taking,"
CESifo Working Paper Series
1796, CESifo Group Munich.
- Fishburn, Peter C. & Willig, Robert D., 1984. "Transfer principles in income redistribution," Journal of Public Economics, Elsevier, vol. 25(3), pages 323-328, December.
- Gollier, Christian & Pratt, John W, 1996. "Risk Vulnerability and the Tempering Effect of Background Risk," Econometrica, Econometric Society, vol. 64(5), pages 1109-23, September.
- repec:hal:journl:hal-00283446 is not listed on IDEAS
- Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, vol. 37(3), pages 353-60, July.
- EECKHOUDT, Louis & SCHLESINGER, Harris, .
"Putting risk in its proper place,"
CORE Discussion Papers RP
-1871, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- X. Henry Wang & Carmen F. Menezes, 2004.
"Increasing Outer Risk,"
0413, Department of Economics, University of Missouri, revised 23 Dec 2004.
- Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-54, January.
- Patrick L. Brockett & Linda L. Golden, 1987. "A Class of Utility Functions Containing all the Common Utility Functions," Management Science, INFORMS, vol. 33(8), pages 955-964, August.
- Kimball, Miles S, 1990.
"Precautionary Saving in the Small and in the Large,"
Econometric Society, vol. 58(1), pages 53-73, January.
- Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- Ekern, Steinar, 1980. "Increasing Nth degree risk," Economics Letters, Elsevier, vol. 6(4), pages 329-333.
- Zilcha, Itzhak & Chew, Soo Hong, 1990. "Invariance of the efficient sets when the expected utility hypothesis is relaxed," Journal of Economic Behavior & Organization, Elsevier, vol. 13(1), pages 125-131, January.
- Guido Baltussen & Thierry Post & Pim van Vliet, 2006. "Violations of Cumulative Prospect Theory in Mixed Gambles with Moderate Probabilities," Management Science, INFORMS, vol. 52(8), pages 1288-1290, August.
- Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March.
- Jean, William H, 1980. " The Geometric Mean and Stochastic Dominance," Journal of Finance, American Finance Association, vol. 35(1), pages 151-58, March.
- Menezes, C & Geiss, C & Tressler, J, 1980. "Increasing Downside Risk," American Economic Review, American Economic Association, vol. 70(5), pages 921-32, December.
- Lajeri-Chaherli, Fatma, 2004. "Proper prudence, standard prudence and precautionary vulnerability," Economics Letters, Elsevier, vol. 82(1), pages 29-34, January.
- Jean, William H, 1984. " The Harmonic Mean and Other Necessary Conditions for Stochastic Dominance," Journal of Finance, American Finance Association, vol. 39(2), pages 527-34, June.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_2467. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra)
If references are entirely missing, you can add them using this form.