On consistency of stochastic dominance and mean-semideviation models

On consistency of stochastic dominance and mean-semideviation models

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Article ID: iaor20014077
Country: Germany
Volume: 89
Issue: 2
Start Page Number: 217
End Page Number: 232
Publication Date: Jan 2001
Journal: Mathematical Programming
Authors: ,
Abstract:

We analyze relations between two methods frequently used for modeling the choice among uncertain outcomes: stochastic dominance and mean–risk approaches. New necessary conditions for stochastic dominance are developed. These conditions compare values of a certain functional, which contains two components: the expected value of a random outcome and a risk term represented by the central semideviation of the corresponding degree. If the weight of the semideviation in the composite objective does not exceed the weight of the expected value, maximization of such a functional yields solutions which are efficient in terms of stochastic dominance. The results are illustrated graphically.

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