Between First and Second-Order Stochastic Dominance
Management Science 63, 2933–2947
44 Pages Posted: 8 Aug 2015 Last revised: 2 Jan 2018
Date Written: November 22, 2015
We develop a continuum of stochastic dominance rules, covering preferences from first to second-order stochastic dominance. The motivation for such a continuum is that while decision makers have preference for "more is better," they are mostly risk averse but cannot assert that they would dislike any risk. For example, situations with targets, aspiration levels, and local convexities in induced utility functions in sequential decision problems may lead to preferences for some risks. We relate our continuum of stochastic dominance rules to utility classes, the corresponding integral conditions, and probability transfers, and discuss the usefulness of these interpretations. Several examples involving, e.g., finite-crossing cumulative distribution functions, location-scale families, and induced utility illustrate the implementation of the framework developed here. Finally, we extend our results to a combined order including convex (risk-taking) stochastic dominance.
Keywords: Stochastic Dominance, Transfers, Indirect Utility
Suggested Citation: Suggested Citation