Journal article
Modifying the mean-variance approach to avoid violations of stochastic dominance
Management Science, Vol.56(11), pp.2050-2057
2010
Abstract
The mean-variance approach is an influential theory of decision under risk proposed by Markowitz (Markowitz, H. 1952. Portfolio selection. J. Finance 7(1) 77-91). The mean-variance approach implies violations of first-order stochastic dominance not commonly observed in the data. This paper proposes a new model in the spirit of the classical mean-variance approach without violations of stochastic dominance. The proposed model represents preferences by a functional U(L)-ρ r (L), where U (L) denotes the expected utility of lottery L, ρ σ [-1, 1] is a subjective constant, and r (L) is the mean absolute (utility) semideviation of lottery L. The model comprises a linear trade-off between expected utility and utility dispersion. The model can accommodate several behavioral regularities such as the Allais paradox and switching behavior in Samuelson's example.
Details
- Title
- Modifying the mean-variance approach to avoid violations of stochastic dominance
- Authors/Creators
- P.R. Blavatskyy (Author/Creator) - Universität Innsbruck
- Publication Details
- Management Science, Vol.56(11), pp.2050-2057
- Publisher
- Institute for Operations Research and Management Sciences
- Identifiers
- 991005541223707891
- Copyright
- © 2010 INFORMS.
- Murdoch Affiliation
- Murdoch University
- Language
- English
- Resource Type
- Journal article
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- Citation topics
- 6 Social Sciences
- 6.122 Economic Theory
- 6.122.1287 Risk Preferences
- Web Of Science research areas
- Management
- Operations Research & Management Science
- ESI research areas
- Economics & Business