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Apportioning of risks via stochastic dominance

Listed author(s):
  • H. Schlesinger
  • L. Eeckhoudt

    (LEM - Lille - Economie et Management - Université de Lille, Sciences et Technologies - Fédération Universitaire et Polytechnique de Lille - Université de Lille, Sciences Humaines et Sociales - CNRS - Centre National de la Recherche Scientifique)

  • I. Tsetlin

Consider a simple two-state risk with equal probabilities for the two states. In particular, assume that the random wealth variable dominates via ith-order stochastic dominance for i=M,N. We show that the 50-50 lottery dominates the lottery 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.

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Paper provided by HAL in its series Post-Print with number hal-00567952.

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Date of creation: 2009
Publication status: Published in Journal of Economic Theory, Elsevier, 2009, 144 (3), pp.994-1003
Handle: RePEc:hal:journl:hal-00567952
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00567952
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