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 r...

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Bibliographic Details
Published in:Management science 2002-08, Vol.48 (8), p.1074-1085
Main Authors: Leshno, Moshe, Levy, Haim
Format: Article
Language:English
Subjects:
almost stochastic dominance
Analytic synthetic distinction
Bond management
Business studies
Cumulative distribution functions
Decision making
Financial bonds
Financial portfolios
Investment horizon
Investors
Management science
Mathematical models
mean-variance
Portfolio management
Preferences
Random variables
Risk aversion
stochastic dominance
Stochastic models
Stocks
Studies
Utility functions
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Summary: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.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.48.8.1074.169