Cumulative Prospect Theory and Mean Variance Analysis: A Rigorous Comparison

Thorsten Hens and János Mayer
Additional contact information
Thorsten Hens: University of Zurich and Norwegian School of Economics and Business Administration and Swiss Finance Institute
János Mayer: University of Zurich

No 14-23, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We compare asset allocations that are derived for cumulative prospect theory (CPT) based on two different methods: maximizing CPT along the mean {variance efficient frontier and maximizing CPT without this restriction. We find that with normally distributed returns, the difference between these two approaches is negligible. However, if standard asset allocation data for pension funds are considered, the difference is considerable. Moreover, for certain types of derivatives, such as call options, the restriction of asset allocations to the mean-variance efficient frontier produces sizable losses in various respects, including decreases in expected returns and expected utility.

Keywords: Cumulative Prospect Theory; Mean Variance Analysis (search for similar items in EconPapers)
JEL-codes: C61 D81 G02 G11 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2014-03
New Economics Papers: this item is included in nep-upt
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://ssrn.com/abstract=2417191 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1423

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().