Transforming Probabilities without Violating Stochastic Dominance

Organizational Behavior and Human Decision Processes

This study tests between two modern theories of decision making. Rankand sign-dependent utility (RSDU) models, including cumulative prospect theory (CPT), imply stochastic dominance and two cumulative independence conditions. Configural weight models, with parameters estimated in previous research, predict systematic violations of these properties for certain choices. Experimental data systemat...

Stochastic Dominance and Prospect Dominance with Subjective Weighting Functions

Stochastic Dominance (SD) rules are used to divide the sets of all feasible uncertain prospects into efficient and inefficient sets (partial ordering). The SD rules (as well as the mean-variance rule) assume that investors agree on the available distributions of returns. Laboratory experiments with and without real money repeatedly reveal that even if all subjects observe the same pair of cumul...

Risky decision making: Testing for violations of transitivity predicted by an editing mechanism

Transitivity is the assumption that if a person prefers A to B and B to C, then that person should prefer A to C. This article explores a paradigm in which Birnbaum, Patton and Lott (1999) thought people might be systematically intransitive. Many undergraduates choose C = ($96, .85; $90, .05; $12, .10) over A = ($96, .9; $14, .05; $12, .05), violating dominance. Perhaps people would detect domi...

Decision criteria in risk analysis : an application of stochastic dominance with respect to a function

Apportioning of risks via stochastic dominance

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 i-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)-order stochastic dominance. The basic idea is that a decision maker exhibiting (N + M)-order stochas...