This paper presents a new model of probabilistic binary choice under risk. In this model, a decision maker always satisfies first-order stochastic dominance. If neither lottery stochastically dominates the other alternative, a decision maker chooses in a probabilistic manner. The proposed model...

The mean-variance approach is an influential theory of decision under risk proposed by Markowitz (Markowitz, H. 1952. Portfolio selection. J. Finance 7(1) 77-91). The mean-variance approach implies violations of first-order stochastic dominance not commonly observed in the data. This paper...

The conventional parameterizations of cumulative prospect theory do not explain the St. Petersburg paradox. To do so, the power coefficient of an individual's utility function must be lower than the power coefficient of an individual's probability weighting function.