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549. Stochastic Dominance Analysis without the Independence Axiom 
by Simone Cerreia– Vioglio, Fabio Maccheroni, Massimo Marinacci

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 maker’s 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.

JEL classi…fication: D81

Keywords: Stochastic dominance, integral stochastic orders, nonexpected utility, risk aversion, multi–-utility representation, prospect theory, choice-acclimating personal equilibria 


Last updated June 24, 2015