Generalized Almost Stochastic Dominance

32 Pages Posted: 18 Sep 2013 Last revised: 16 Apr 2014

See all articles by Rachel J. Huang

Rachel J. Huang

National Central University at Taiwan - Department of Finance; Graduate Institute of Finance, NTUST

Ilia Tsetlin

INSEAD

Larry Y. Tzeng

National Taiwan University - Department of Finance

Robert L. Winkler

Duke University - Fuqua School of Business

Date Written: March 27, 2014

Abstract

Almost stochastic dominance allows small violations of stochastic dominance rules to avoid situations where most decision makers prefer one alternative to another but stochastic dominance cannot rank them. While the idea behind almost stochastic dominance is quite promising, it has not caught on in practice. Implementation issues and inconsistencies between integral conditions and their associated utility classes contribute to this situation. We develop generalized almost second-degree stochastic dominance and almost second-degree risk in terms of the appropriate utility classes and their corresponding integral conditions, and extend these concepts to higher degrees. We address implementation issues and show that generalized almost stochastic dominance inherits the appealing properties of stochastic dominance. Finally, we defi…ne convex generalized almost stochastic dominance to deal with risk-loving preferences. Generalized almost stochastic dominance could be useful in decision analysis, in empirical research (e.g., in fi…nance), and in theoretical analyses of applied situations.

Keywords: Decision Analysis, Stochastic Dominance, Utility, Risk, Probability, Distribution Comparisons

Suggested Citation

Huang, Rachel J. and Tsetlin, Ilia and Tzeng, Larry and Winkler, Robert L., Generalized Almost Stochastic Dominance (March 27, 2014). INSEAD Working Paper No. 2014/30/DSC. Available at SSRN: https://ssrn.com/abstract=2327022 or http://dx.doi.org/10.2139/ssrn.2327022

Rachel J. Huang

National Central University at Taiwan - Department of Finance ( email )

No. 300, Jhongda Rd, Jhogli City, Taoyuan, Taiwan,
Jhongli, TY 32001
Taiwan

Graduate Institute of Finance, NTUST ( email )

#43,Sec.4
Keelung Rd
Taipei, Taipei 106
Taiwan

Ilia Tsetlin (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Larry Tzeng

National Taiwan University - Department of Finance ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Robert L. Winkler

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

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