Decision Analysis Working Paper Abstract
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WP030020
|
Title: Stochastic Dominance and Decision Weights: Theory and
Experiments
Authors: Manel
Baucells IESE Business School, University of Navarra & Duke
University and Franz
H. Heukamp IESE Business School, University of Navarra
Date:
Status: Working Paper
Based on recent theoretical and empirical results about the significance
of Cumulative Prospect Theory (CPT), we define RWc- SD, an extended notion
of stochastic dominance that accounts for both the reflection effect (R)
and the probability weighting (Wc). A second definition of stochastic
dominance (R*Wd-SD) for preferences with reverse reflection effect (R*)
as in Markowitz (1952) is presented. Using these definitions, we empirically
discriminate between two competing explanations of behavior under risk,
namely, CPT and Markowitz. Our experiments reject the reverse reflection
e?ect recently advocated by Levy and Levy (2002a) and offer insight into
the relevance of the weighting function in empirical research on choice
under risk.
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