We characterize the consistency of a large class of nonexpected utility preferences (including mean-variance preferences and prospect theory preferences) with stochastic orders (for example, stochastic dominances of different degrees). Our characterization rests on a novel decision theoretic result that provides a behavioral interpretation of the set of all derivatives of the functional representing the decision makers preferences. As an illustration, we consider in some detail prospect theory and choice-acclimating preferences, two popular models of reference dependence under risk, and we show the incompatibility of loss aversion with prudence.
Keywords: Stochastic dominance, integral stochastic orders, nonexpected utility, risk aversion, multi-utility representation, prospect theory, choice-acclimating personal equilibria
IGIER - Università Bocconi