First degree stochastic dominance violations: Decision weights and bounded rationality

Haim Levy*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

17 Scopus citations

Abstract

Expected Utility Theory, Rank Dependent Expected Utility and Cumulative Prospect Theory imply no First Degree Stochastic Dominance (FSD) violations. Prospect Theory and Configural Weight models either allow for FSD violation or even predict this phenomenon. I find experimentally that FSD violations are not significant, and hence conclude that they are due to bounded rationality rather than to a systematic and predictable effect. Moreover, the more transparent the FSD, the less violations are observed, which supports the bounded rationality hypothesis. Therefore, based on the FSD violations observed in my experiments, the above three paradigms cannot be rejected.

Original languageEnglish
Pages (from-to)759-774
Number of pages16
JournalEconomic Journal
Volume118
Issue number528
DOIs
StatePublished - Apr 2008

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