Fractional degree stochastic dominance

Rachel J. Huang, Larry Y. Tzeng, Lin Zhao

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

Abstract

We develop a continuum of stochastic dominance rules for expected utility maximizers. The new rules encompass the traditional integer-degree stochastic dominance; between adjacent integer degrees, they formulate the consensus of individuals whose absolute risk aversion at the corresponding integer degree has a negative lower bound. By extending the concept of "uniform risk aversion"previously proposed in the literature to high-order risk preferences, we interpret the fractionalized degree parameter as a benchmark individual relative to whom all considered individuals are uniformly no less risk averse in the lottery choices. The equivalent distribution conditions for the newrules are provided, and the fractional degree "increase in risk"is defined. We generalize the previously defined notion of "risk apportionment"and demonstrate its usefulness in characterizing comparative statics of risk changes in fractional degrees.

Original languageEnglish
Pages (from-to)4630-4647
Number of pages18
JournalManagement Science
Volume66
Issue number10
DOIs
StatePublished - Oct 2020

Keywords

  • Higher-order risk preferences
  • Risk aversion
  • Risk lovingness
  • Risk taking
  • Stochastic dominance

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