Ulric B. and Evelyn L. Bray Social Sciences Seminar

Wednesday, October 31, 2018
4:00pm to 5:00pm
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Baxter B125
Stochastic Dominance under Independent Noise
Luciano Pomatto, Assistant Professor of Economics, Division of the Humanities and Social Sciences, Caltech,

Abstract: We show that the presence of statistically independent noise facilitates the ranking of gambles in terms of stochastic dominance. In particular, we address the following question: Given two random variables, X and Y, under what conditions is it possible to find a random variable Z, independent from X and Y, so that X + Z first-order stochastically dominates Y + Z? We show that such a Z exists whenever X has higher expectation than Y. In addition, if X and Y have equal mean, but the first has lower variance, then Z can be chosen so that X + Z dominates Y + Z in terms of second-order stochastic dominance. We present applications to choice under risk, the axiomatization of mean-variance preferences, and mechanism design with risk averse agents.

Joint work with Philipp Strack and Omer Tamuz.

For more information, please contact Mary Martin by phone at 626-395-5884 or by email at mmartin@caltech.edu or visit the full paper, "Stochastic Dominance Under Independent Noise," here..