Stochastic Dominance Investment Decision Making under Uncertainty
This updated 3rd edition is devoted to the analysis of various Stochastic Dominance (SD) decision rules. It discusses the pros and cons of each of the alternate SD rules, the application of these rules to various research areas like statistics, agricultur
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Stochastic Dominance Investment Decision Making under Uncertainty Third Edition
Stochastic Dominance
Haim Levy
Stochastic Dominance Investment Decision Making under Uncertainty Third Edition
Haim Levy School of Business Administration The Hebrew University of Jerusalem Jerusalem, Israel
ISBN 978-3-319-21707-9 ISBN 978-3-319-21708-6 DOI 10.1007/978-3-319-21708-6
(eBook)
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To My Family
Preface
Concepts similar to stochastic dominance have been known for many years, but the three papers published by Hadar and Russell and Hanoch and Levy in 1969 and by Rothschild and Stiglitz in 19701 paved the way for a new paradigm called stochastic dominance (SD), with hundreds of studies following these three studies. While Hanoch and Levy and Hadar and Russell developed First and Second degree SD rules (FSD and SSD rules), the focus of the paper by Rothschild and Stiglitz is mainly on the definition of risk and how to quantify it. By searching for the appropriate risk measure, they developed SSD rule for prospects with equal means. The need to develop the stochastic dominance rules, at least in my view, stems from paradoxes that are sometimes revealed by the commonly employed meanvariance (MV) rule. To be more specific, there are cases in which a clear-cut preference between two risky assets exists, yet the mean-variance rule is unable to rank the two alternative prospects under consideration. While I do not know what was the trigger for the other researchers mentioned above to develop the SD rules, I can only tell my personal story. When I was a second-year MBA student (in 1965), only the Markowitz MV investment rule was taught in portfolio
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