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Stochastic dominance, risk and disappointment: a synthesis

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Abstract

The theory of disappointment of Loomrs and Sugden [1986] has never been given an axiomatics. This article, where a theory of disappointment is derived from a simple axiomatics, makes up for this omission. The new theory is close to that of Loomes and Sugden although the functional representing the preferences of the decision-maker is now lottery-dependent. Actually, preferences exhibit four properties of interest: (a) risk-averse and risk prone investors actually behave differently; (b) risk is defined in a consistent way with risk aversion; (c) the functional is nothing but the opposite to a convex measure of risk (Föllmer and Schied [2002]) when constant marginal utility is assumed and (d) violations of the second-order stochastic dominance property are allowed for when monetary values are taken into account (but not when "utils" are substituted for them). Moreover, the preorder induced by stochastic dominance over utils is as "close" to the preorder of preferences as possible and utility functions may be elicited through experimental testing

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  • Thierry Chauveau, 2014. "Stochastic dominance, risk and disappointment: a synthesis," Documents de travail du Centre d'Economie de la Sorbonne 14054r, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Jul 2015.
    • Handle: RePEc:mse:cesdoc:14054r
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    1. Jia, Jianmin & Dyer, James S & Butler, John C, 2001. "Generalized Disappointment Models," Journal of Risk and Uncertainty, Springer, vol. 22(1), pages 59-78, January.
    2. Ulrich Schmidt, 2001. "Lottery Dependent Utility: a Reexamination," Theory and Decision, Springer, vol. 50(1), pages 35-58, February.
    3. van Dijk, Wilco W. & Zeelenberg, Marcel & van der Pligt, Joop, 2003. "Blessed are those who expect nothing: Lowering expectations as a way of avoiding disappointment," Journal of Economic Psychology, Elsevier, vol. 24(4), pages 505-516, August.
    4. Joao L. Becker & Rakesh K. Sarin, 1987. "Lottery Dependent Utility," Management Science, INFORMS, vol. 33(11), pages 1367-1382, November.
    5. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    6. Grant, Simon & Kajii, Atsushi, 1998. "AUSI expected utility: An anticipated utility theory of relative disappointment aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 37(3), pages 277-290, November.
    7. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
    8. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-686, May.
    9. Philippe Delquié & Alessandra Cillo, 2006. "Disappointment without prior expectation: a unifying perspective on decision under risk," Journal of Risk and Uncertainty, Springer, vol. 33(3), pages 197-215, December.
    10. David E. Bell, 1985. "Disappointment in Decision Making Under Uncertainty," Operations Research, INFORMS, vol. 33(1), pages 1-27, February.
    11. 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.
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    More about this item

    Keywords

    Disappointment; risk-aversion; expected utility; risk premium; stochastic dominance; subjective risk;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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