Decision Theory Matters for Financial Advice
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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.
KeywordsCumulative prospect theory Expected utility analysis Mean–variance analysis
JEL ClassificationC61 D81 G02 G11
This research was supported by the Swiss National Science Foundation, Grant No. 100018-149934.
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