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Preferred by “All” and Preferred by “Most” Decision Makers: Almost Stochastic Dominance

Preferred by “All” and Preferred by “Most” Decision Makers: Almost Stochastic Dominance While “most” decision makers may prefer one uncertain prospect over another, stochastic dominance rules as well as other investment criteria, will not reveal this preference due to some extreme utility functions in the case of even a very small violation of these rules. Such strict rules relate to “all” utility functions in a given class including extreme ones which presumably rarely represents investors' preference. In this paper we establish almost stochastic dominance (ASD) rules which formally reveal a preference for “most” decision makers, but not for “all” of them. The ASD rules reveal that choices which probably conform with “most” decision makers also solve some debates, e.g., showing, as practitioners claim, an ASD preference for a higher proportion of stocks in the portfolio as the investment horizon increases, a conclusion which is not implied by the well-known stochastic dominance rules. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Science INFORMS

Preferred by “All” and Preferred by “Most” Decision Makers: Almost Stochastic Dominance

Leshno, Moshe; Levy, Haim
Management Science , Volume 48 (8): 12 – Aug 15, 2002
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References (12)

Publisher
INFORMS
Copyright
Copyright © INFORMS
Subject
Research Article
ISSN
0025-1909
eISSN
1526-5501
DOI
10.1287/mnsc.48.8.1074.169
Publisher site
See Article on Publisher Site

Abstract

While “most” decision makers may prefer one uncertain prospect over another, stochastic dominance rules as well as other investment criteria, will not reveal this preference due to some extreme utility functions in the case of even a very small violation of these rules. Such strict rules relate to “all” utility functions in a given class including extreme ones which presumably rarely represents investors' preference. In this paper we establish almost stochastic dominance (ASD) rules which formally reveal a preference for “most” decision makers, but not for “all” of them. The ASD rules reveal that choices which probably conform with “most” decision makers also solve some debates, e.g., showing, as practitioners claim, an ASD preference for a higher proportion of stocks in the portfolio as the investment horizon increases, a conclusion which is not implied by the well-known stochastic dominance rules.

Journal

Management Science – INFORMS

Published: Aug 15, 2002

Keywords: Keywords : stochastic dominance ; almost stochastic dominance ; mean-variance ; risk aversion

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