Some problems in the analysis of stochastic dominance

Abstract

The use of stochastic dominance has become common in finance and economics. As a theoretical device it is used to define a preference relation on a set of decision alternatives, thereby reducing the number of these alternatives which must be considered further by the decision-maker. However, in practice, data must be collected to estimate probability distributions. The paper discusses the errors which may result and the computation of their probabilities. The connection with statistical hypothesis testing is discussed.