Ilia Tsetlin, Robert L. Winkler, Rachel J. Huang, Larry Y. Tzeng
Almost stochastic dominance allows small violations of stochastic dominance rules to avoid situations where most decision makers prefer one alternative to another but stochastic dominance cannot rank them. While the idea behind almost stochastic dominance is quite promising, it has not caught on in practice. Implementation issues and inconsistencies between integral conditions and their associated utility classes contribute to this situation. We develop generalized almost second-degree stochastic dominance and almost second-degree risk in terms of the appropriate utility classes and their corresponding integral conditions, and extend these concepts to higher degrees. We address implementation issues and show that generalized almost stochastic dominance inherits the appealing properties of stochastic dominance. Finally, we define convex generalized almost stochastic dominance to deal with risk-prone preferences. Generalized almost stochastic dominance could be useful in decision analysis, empirical research (e.g., in finance), and theoretical analyses of applied situations. © 2015 INFORMS.
INSEAD, Singapore, 138676, Singapore; Fuqua School of Business, Duke University, Durham, 27708, NC, United States; Department of Finance, National Central University, Jhongli City, Taoyuan County, 32001, Taiwan; Department of Finance, National Taiwan University, Taipei 106, Taiwan
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