Stochastic dominance, risk and disappointment: a synthesis
Year: 2016
Type: preprint
Abstract: In this article, utilities are substituted for monetary values in the definition of second order stochastic dominance (SSD). Doing so yields a family of preorders induced by SSD among which one is the "closest" to the original preorder of preferences. The corresponding utility function is the most likely to be that of the decision maker. It may be defined before behavioural axioms are set. Theories of decision making under risk can then be restated in a more general and consistent way. As an example, a new theory of disappointment is developed, which is endowed with three important properties: (a) risk premia are invariant by translation, (b) when constant marginal utility is assumed, preferences are represented by a functional which is the opposite to a convex measure of risk and (c) the functional representing preferences and the utility function can be easily elicited through experimental testing.
Author: Thierry Chauveau
Institution: Centre d'Économie de la Sorbonne
Language: English
Subfield: General Decision Sciences
Field: Decision Sciences
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1527920476