Extending the Applicability of Stochastic Dominance Decision Rules.

W. K. Viscusi

Expert InsightsPublished 1972

A contribution to statistical decision theory. The limitations of existing stochastic dominance theory are demonstrated, and three more useful decision rules are derived, for choosing between uncertain investment prospects. Public investment decisions are emphasized, e.g., developing recreational fishing vs. swimming, or precautions against several diseases. The circumstances under which stochastic dominance principles apply to pairwise comparison of assets are spelled out. To apply any of the new decision rules, one continuous von Neumann-Morgenstern utility function must be constructed. For public investment, the rules can be implemented on an individual utility function approach if the stochastic relation holds for all those affected by an investment. Alternatively, the universal stochastic relations can be used with a single index social welfare function. Either way, detailed knowledge of the beneficiaries' preferences is not required, and the decision can be made with very limited knowledge of initial portfolio holdings. 16 pp. Ref.

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Viscusi, W. K., Extending the Applicability of Stochastic Dominance Decision Rules. Santa Monica, CA: RAND Corporation, 1972. https://www.rand.org/pubs/papers/P4884.html.
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