Financial Engineering Seminar
September, 16, 2005(Fri)
Time: 3:00 pm,
Place: 303 Weil Hall (conference room)
Inverse Stochastic Dominance Constraints and Rank Dependent Expected Utility Theory
We consider optimization problems with second order stochastic dominance constraints
formulated as a relation of Lorenz curves. We characterize the relation in terms
of rank dependent utility functions, which generalize Yaari's utility functions.
We develop optimality conditions and duality theory for problems with Lorenz
dominance constraints. We prove that Lagrange multipliers associated with
these constraints can be identified with rank dependent utility functions. The problem is
numerically tractable in the case of discrete distributions with equally
probable realizations. This is a joint work with Andrzej Ruszczynski.