Relative Risk Aversion and Stochastic-Statistical Dominance

상대적(相對的) 위험(危險)과 추계적(推計的)-통계적(統計的) 우세법칙(優勢法則)

This paper presents stochastic-statistical dominance rules which eliminate dominated alternatives thereby reduce the number of satisficing alternatives to a manageable size so that the decision maker can choose the best alternative among them when neither the utility function nor the probability distribution of outcomes is exactly known. Specifically, it is assumed that only the characteristics of the utility function and the value function are known. Also, it is assumed that prior probabilities of the mutually exclusive states of nature are not known, but their relative bounds are known. First, the notion of relative risk aversion is used to describe the decision maker's attitude toward risk, which is defined with the acknowledgement that the utility function of the decision maker is a composite function of a cardinal value function and a utility function with-respect to the value function. Then, stochastic-statistical dominance rules are developed to screen out dominated alternatives according to the decision maker's attitude toward risk represented in the form of the measure of relative risk aversion.