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Stochastic dominance, risk and disappointment: a synthesis

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  • Thierry Chauveau

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

In this article, utilities are substituted for monetary values in the definition of second order stochastic dominance (SSD). Doing so yields a family of preorders induced by SSD among which one is the "closest" to the original preorder of preferences. The corresponding utility function is the most likely to be that of the decision maker. It may be defined before behavioural axioms are set. Theories of decision making under risk can then be restated in a more general and consistent way. As an example, a new theory of disappointment is developed, which is endowed with three important properties: (a) risk premia are invariant by translation, (b) when constant marginal utility is assumed, preferences are represented by a functional which is the opposite to a convex measure of risk and (c) the functional representing preferences and the utility function can be easily elicited through experimental testing.

Suggested Citation

  • Thierry Chauveau, 2016. "Stochastic dominance, risk and disappointment: a synthesis," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01025102, HAL.
    • Handle: RePEc:hal:cesptp:halshs-01025102
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01025102v3
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    References listed on IDEAS

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    1. Hans Föllmer & Alexander Schied, 2002. "Convex measures of risk and trading constraints," Finance and Stochastics, Springer, vol. 6(4), pages 429-447.
    2. Thierry Chauveau & Nicolas Nalpas, 2010. "Disappointment Models: an axiomatic approach," Documents de travail du Centre d'Economie de la Sorbonne 10102, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    3. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    4. Graham Loomes & Robert Sugden, 1986. "Disappointment and Dynamic Consistency in Choice under Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(2), pages 271-282.
    5. Joao L. Becker & Rakesh K. Sarin, 1987. "Lottery Dependent Utility," Management Science, INFORMS, vol. 33(11), pages 1367-1382, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    disappointment; risk-aversion; expected utility; risk premium; stochastic dominance; subjective risk; déception; aversion pour le risque; risque subjectif; prime de risque; utilité espérée;
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