We characterize the consistency of a large class of nonexpected utility preferences (including mean- variance preferences and prospect theory preferences) with stochastic orders (for example, stochastic dominances of different degrees). Our characterization rests on a novel decision theoretic result that provides a behavioral interpretation of the set of all derivatives of the functional representing the decision makers preferences. As an illustration, we consider in some detail prospect theory and choice-acclimating preferences, two popular models of reference dependence under risk, and we show the incompatibility of loss aversion with prudence.

Stochastic dominance analysis without the independence axiom

CERREIA VIOGLIO, SIMONE;MACCHERONI, FABIO ANGELO;MARINACCI, MASSIMO
2017

Abstract

We characterize the consistency of a large class of nonexpected utility preferences (including mean- variance preferences and prospect theory preferences) with stochastic orders (for example, stochastic dominances of different degrees). Our characterization rests on a novel decision theoretic result that provides a behavioral interpretation of the set of all derivatives of the functional representing the decision makers preferences. As an illustration, we consider in some detail prospect theory and choice-acclimating preferences, two popular models of reference dependence under risk, and we show the incompatibility of loss aversion with prudence.
2017
2016
CERREIA VIOGLIO, Simone; Maccheroni, FABIO ANGELO; Marinacci, Massimo
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/3985702
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