Stochastic Dominance

Volume 12 of the series Studies in Risk and Uncertainty pp 215-228

The Empirical Studies

  • Haim LevyAffiliated withThe Hebrew University of Jerusalem

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In judging the quality of an investment decision making rule, two factors have to be taken into account: a) its underlying assumptions; b) its effectiveness in terms of the relative size of the resultant efficient set. Based solely on the first factor, the FSD is the best rule because the only assumption needed for its derivation is that U ∈ U1 or U′ ≥ 0. However, the FSD rule is likely to be ineffective in that the resultant efficient set may not be much smaller than the feasible set. Generally, the larger the number of assumptions (e.g., risk aversion, decreasing absolute risk aversion), the smaller the induced efficient set.