RISK-AVERSION: MATHEMATICAL AND ECONOMIC PERSPECTIVES

Haim Levy

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

A necessary condition for a dominance of prospect F over prospect G by all commonly employed investment criteria is EF(x)≥EG(x). Because of this requirement, optimal investment rules fail to distinguish between two alternative prospects where in practice one prospect is preferred over the other by all investors - a paradoxical result. We suggest the general almost second-degree stochastic dominance rule (GASSD) that relaxes this necessary condition, resolves the existing paradoxes and distinguishes between mathematically and economically relevant preferences. In the comparison of stocks and bonds for various horizons, the GASSD rule does not support the idiom "stocks for the long run".

Original languageEnglish
Article number2250011
JournalAnnals of Financial Economics
Volume17
Issue number2
DOIs
StatePublished - 1 Jun 2022

Bibliographical note

Publisher Copyright:
© 2022 World Scientific Publishing Company.

Keywords

  • "stocks for the long run"
  • almost SSD (ASSD)
  • economically irrelevant preferences (EIP)
  • economically relevant preferences (ERP)
  • general ASSD (GASSD)
  • Second-degree stochastic dominance (SSD)

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