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Title:Apportioning of risks via stochastic dominance PDF Logo
Authors:Eeckhoudt, Louis
Schlesinger, Harris
Tsetlin, Ilia
Issue Date:2008
Series/Report no.:CESifo working paper 2467
Abstract:Consider a simple two-state risk with equal probabilities for the two states. In particular, assume that the random wealth variable Xi dominates Yi via ith-order stochastic dominance for i = M,N. We show that the 50-50 lottery [XN + YM, YN + XM] dominates the lottery [XN + XM, YN + YM] via (N + M)th-order stochastic dominance. The basic idea is that a decision maker exhibiting (N + M)th-order stochastic dominance preference will allocate the state-contingent lotteries in such a way as not to group the two bad lotteries in the same state, where bad is defined via ith-order stochastic dominance. In this way, we can extend and generalize existing results about risk attitudes. This lottery preference includes behavior exhibiting higher order risk effects, such as precautionary effects and tempering effects.
Subjects:Downside risk
precautionary effects
prudence
risk apportionment
risk aversion
stochastic dominance
temperance
JEL:D81
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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