Using first degree stochastic dominance in allocation tasks: an experimental study

Abstract

By using subgroup analysis, this paper presents the results of an experiment designed to determine the frequency with which individuals use the first degree stochastic dominant (FSD) rule for allocation tasks. We show experimentally that some participants used the FSD rule for allocation tasks and, as a result, invest only in the dominant asset. These people did not take the mean variance (MV) rule into consideration, even though it is relevant for diversification. The other participants used the MV rule without considering the FSD rule, although they could have used it. Our analysis of the subgroups is important, because on the basis of our data it would be possible to mistakenly conclude that the different allocation rates are a result of different attitudes to risk or different utility functions.

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