Nonmonotonic risk preferences over lottery comparison

This paper provides a novel characterization of decision makers’ nonmonotonic risk preferences beyond risk aversion, prudence, temperance, etc. Specifically, it establishes a framework that uses decision-makers’ choices between binary lotteries to characterize their nonmonotonic risk preferences. This framework extends the seminal work of Eeckhoudt and Schlesinger [Eeckhoudt, L. and H. Schlesinger, 2006, Putting risk in its proper place, American Economic Review, 96(1): 280–289]. We further demonstrate the close relationships between the characterized nonmonotonic risk preferences and the non-integer stochastic dominance (and the related almost stochastic dominance), and propose non-integer stochastic dominance between the second- and third-order stochastic dominances and a new type of almost stochastic dominance. Moreover, we show that the framework provides a method to experimentally elicit decision makers’ nonmonotonic risk preferences.