Weighted Utility and Optimism/Pessimism: A Decision-Theoretic Foundation of Various Stochastic Dominance Orders

Abstract

We show that a probability distribution likelihood ratio dominates another distribution if and only if, for every weighted utility function, the former is preferred over the latter. Likewise, a probability distribution hazard rate (or reverse hazard rate) dominates another distribution if and only if, the former is preferred by every optimistic (or pessimistic) decision maker. (JEL D11, D83)