Distorted stochastic dominance: A generalized family of stochastic orders

Abstract

We study a generalized family of stochastic orders, semiparametrized by a distortion function H, namely H-distorted stochastic dominance, which may determine a continuum of dominance relations from the firstto the second-order stochastic dominance (and beyond). Such a family is especially suitable for representing a decision maker's preferences in terms of risk aversion and may be used in those situations in which a strong order does not have enough discriminative power, whilst a weaker one is poorly representative of some classes of decision makers. In particular, we focus on the class of power distortion functions, yielding power-distorted stochastic dominance, which seems to be particularly appealing owing to its computational simplicity and some interesting statistical interpretations. Finally, we characterize distorted stochastic dominance in terms of distortion functions yielding isotonic classes of distorted expectations.