Safety-First, Stochastic Dominance, and Optimal Portfolio Choice

Abstract

Stochastic Dominance rules are playing an increasingly prominent role in the literature on choice under uncertainty. Their foundation is the mainstream VonNeumann-Morgenstern expected utility paradigm. Their essence is to provide an admissible set of choices under restrictions on the utility functions that follow from prevalent and appealing modes of economic behavior: The admissible sets generated are useful for a large group of individual decision makers and the optimal choice for an individual can then be obtained from among the smaller set of admissible choices.