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Prospect theory and mean-variance analysis: Does it make a difference in wealth management?


De Giorgi, Enrico; Hens, Thorsten (2009). Prospect theory and mean-variance analysis: Does it make a difference in wealth management? Investment Management and Financial Innovations, 6(1):122-129.

Abstract

We show that prospect theory is a valuable paradigm for wealth management. It describes well how investors perceive
risk and with appropriate modeling it can be made consistent with rational decision making. Moreover, it can be
represented in a simple reward-risk diagram so that the main ideas are easily communicated to clients. Finally, we
show on data from a large set of private clients that there are considerable monetary gains from introducing prospect
theory instead of mean-variance analysis into the client advisory process.

Abstract

We show that prospect theory is a valuable paradigm for wealth management. It describes well how investors perceive
risk and with appropriate modeling it can be made consistent with rational decision making. Moreover, it can be
represented in a simple reward-risk diagram so that the main ideas are easily communicated to clients. Finally, we
show on data from a large set of private clients that there are considerable monetary gains from introducing prospect
theory instead of mean-variance analysis into the client advisory process.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2009
Deposited On:10 Nov 2011 13:45
Last Modified:07 Dec 2017 09:32
Publisher:Dilovi Perspektyvy
ISSN:1810-4967
Related URLs:http://www.businessperspectives.org/component/option,com_journals/task,issue/id,125/jid,4/Itemid,74/

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