# Stochastic Dominance

## Investment Decision Making under Uncertainty

Part of the Studies in Risk and Uncertainty book series (SIRU, volume 12)

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Part of the Studies in Risk and Uncertainty book series (SIRU, volume 12)

This book is devoted to investment decision-making under uncertainty. The book covers three basic approaches to this process: a) The stochastic dominance approach, developed on the foundation of von Neumann and Morgenstern' expected utility paradigm. 2 b) The mean-variance approach developed by Markowitz on the foundation of von-Neumann and Morgenstem's expected utility or simply on the assumption of a utility function based on mean and variance. c) The non-expected utility approach, focusing on prospect theory and its modi fied version, cumulative prospect theory. This theory is based on an experi mental finding that subjects participating in laboratory experiments often violate expected utility maximization: They tend to use · subjective probability beliefs that differ systematically from the objective probabilities and to base their decisions on changes in wealth rather than on total wealth. The above approaches are discussed and compared in this book. W e also discuss cases in which stochastic dominance rules coincide with the mean-variance rule and cases in which contradictions between these two approaches may occur. We then discuss the relationship between stochastic dominance rules and prospect theory, and establish a new investment decision rule which combines the two and which we call prospect stochastic dominance. Although all three approaches are discussed, most of the book is devoted to the stochastic dominance paradigm.

Finance Investment Portfolio Selection algorithms decision making distribution diversification economics portfolio research utility utility theory value-at-risk

- DOI https://doi.org/10.1007/978-1-4757-2840-8
- Copyright Information Springer-Verlag US 1998
- Publisher Name Springer, Boston, MA
- eBook Packages Springer Book Archive
- Print ISBN 978-1-4757-2842-2
- Online ISBN 978-1-4757-2840-8
- Series Print ISSN 0926-972X
- Buy this book on publisher's site