Between first- and second-order stochastic dominance


Journal Article

© 2016 INFORMS. 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 decisionmakers have a preference for "more is better," they aremostly 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.

Full Text

Duke Authors

Cited Authors

  • Müller, A; Scarsini, M; Tsetlin, I; Winkler, RL

Published Date

  • September 1, 2017

Published In

Volume / Issue

  • 63 / 9

Start / End Page

  • 2933 - 2947

Electronic International Standard Serial Number (EISSN)

  • 1526-5501

International Standard Serial Number (ISSN)

  • 0025-1909

Digital Object Identifier (DOI)

  • 10.1287/mnsc.2016.2486

Citation Source

  • Scopus