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.File | Dimensione | Formato | |
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