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Computational Economics

, Volume 52, Issue 1, pp 195–226 | Cite as

Decision Theory Matters for Financial Advice

  • Thorsten Hens
  • János Mayer
Article
  • 276 Downloads

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.

Keywords

Cumulative prospect theory Expected utility analysis Mean–variance analysis 

JEL Classification

C61 D81 G02 G11 

Notes

Acknowledgements

This research was supported by the Swiss National Science Foundation, Grant No. 100018-149934.

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Department of Banking and Finance, University of ZurichSwiss Finance InstituteZurichSwitzerland
  2. 2.Norwegian School of EconomicBergenNorway
  3. 3.Department of Business AdministrationUniversity of ZurichZurichSwitzerland

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