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Weighted Utility and Optimism/Pessimism: A Decision-Theoretic Foundation of Various Stochastic Dominance Orders

Author

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  • Tao Wang
  • Ehud Lehrer

Abstract

We show that a probability distribution likelihood ratio dominates another distribution if and only if, for every weighted utility function, the former is preferred over the latter. Likewise, a probability distribution hazard rate (or reverse hazard rate) dominates another distribution if and only if, the former is preferred by every optimistic (or pessimistic) decision maker.

Suggested Citation

  • Tao Wang & Ehud Lehrer, 2024. "Weighted Utility and Optimism/Pessimism: A Decision-Theoretic Foundation of Various Stochastic Dominance Orders," American Economic Journal: Microeconomics, American Economic Association, vol. 16(1), pages 210-223, February.
    • Handle: RePEc:aea:aejmic:v:16:y:2024:i:1:p:210-23
    DOI: 10.1257/mic.20220350
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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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