Probabilistic Sophistication, Second Order Stochastic Dominance, and Uncertainty Aversion

Abstract

We study the interplay of probabilistic sophistication, second order stochastic dominance, and uncertainty aversion, three fundamental notions in choice under uncertainty. In particular, our main result, Theorem 2, characterizes uncertainty averse preferences that satisfy second order stochastic dominance, as well as uncertainty averse preferences that are probabilistically sophisticated.Probabilistic Sophistication; Second Order Stochastic Dominance; Uncertainty Aversion; Unambiguous Events; Subjective Expected Utility