Rank dependent expected utility: Stochastic dominance, risk preference, and certainty equivalence (Q1329120)

This paper examines a nonexpected utility theory -- ``expected utility with rank dependent probability'' (EURDP) or ``anticipated utility'' -- with respect to risk aversion and other preference properties. One advantage of EURDP, compared to expected utility, is that it admits a larger class of behavioral types than just pure risk aversion or risk seeking. As shown here, the properties of the underlying functions in EURDP determine risk preference. Several well known experiments are reexamined here to derive implications about the nature of the underlying functions in EURDP. Another important property of EURDP is that it is consistent with first- order stochastic dominance. Here, the relationships of both first- and second-order stochastic dominance to EURDP are examined. Results regarding dominance similar to those obtained for expected utility are derived here for EURDP. Dominance is defined below, following a detailed description of EURDP and a comparison to other nonexpected utility theories.