Orderings and Probability Functionals Consistent with Preferences |
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| Authors: | Sergio Ortobelli Svetlozar T Rachev Haim Shalit |
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| Institution: | 1. Department MSIA , University of Bergamo , Bergamo, Italy;2. Department of Econometrics, Statistics and Mathematical Finance, School of Economics and Business Engineering, University of Karlsruhe and the KIT, Germany , University of California at Santa Barbara and FinAnalytica INC;3. Department of Economics , Ben‐Gurion University , Israel |
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| Abstract: | This paper unifies the classical theory of stochastic dominance and investor preferences with the recent literature on risk measures applied to the choice problem faced by investors. First, we summarize the main stochastic dominance rules used in the finance literature. Then we discuss the connection with the theory of integral stochastic orders and we introduce orderings consistent with investors' preferences. Thus, we classify them, distinguishing several categories of orderings associated with different classes of investors. Finally, we show how we can use risk measures and orderings consistent with some preferences to determine the investors' optimal choices. |
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| Keywords: | Stochastic dominance probability functionals integral orderings coherent and convex measures utility theory efficient choices |
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