Stochastic dominance and prospect dominance with subjective weighting functions (Q1272932)

The purpose of this paper is to analyze under what set of transformations \({\mathbf T}_1\), the first degree stochastic dominance is unaffected (we use bold letters for sets to distinguish between a set of transformations and a particular one). Similarly, we check the set of transformations \({\mathbf T}_2\), which do not affect second degree stochastic dominance. Note that if the SD (partial ordering) is not affected by a set of transformations, then all investors can employ the same transformation or various transformations as long as they belong to the set we consider. The structure of the paper is as follows: In section I we present the well-known stochastic dominance rules as well as the new prospect stochastic dominance rule. In section 2 we show that for each type of stochastic dominance there exists a corresponding class of transformations which do not change the dominance relation. Concluding remarks are given in section 3.