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Decision Theory Matters for Financial Advice


Hens, Thorsten; Mayer, János (2018). Decision Theory Matters for Financial Advice. Computational Economics, 52(1):195-226.

Abstract

We show that the optimal asset allocation for an investor depends crucially on the decision theory with which the investor is modeled. For the same market data and the same client data different theories lead to different portfolios. The market data we consider is standard asset allocation data. The client data is determined by a standard risk profiling question and the theories we apply are mean–variance analysis, expected utility analysis and cumulative prospect theory. For testing the robustness of our results, we carry out the comparisons for alternative data sets and also for variants of the risk profiling question.

Abstract

We show that the optimal asset allocation for an investor depends crucially on the decision theory with which the investor is modeled. For the same market data and the same client data different theories lead to different portfolios. The market data we consider is standard asset allocation data. The client data is determined by a standard risk profiling question and the theories we apply are mean–variance analysis, expected utility analysis and cumulative prospect theory. For testing the robustness of our results, we carry out the comparisons for alternative data sets and also for variants of the risk profiling question.

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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:1 June 2018
Deposited On:07 Mar 2019 09:22
Last Modified:07 Mar 2019 09:33
Publisher:Springer
ISSN:0927-7099
OA Status:Closed
Publisher DOI:https://doi.org/10.1007/s10614-017-9668-6
Other Identification Number:merlin-id:14697

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