Decision Theory Matters for Financial Advice

Thorsten Hens () and János Mayer ()
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Thorsten Hens: Swiss Finance Institute
János Mayer: University of Zurich

Computational Economics, 2018, vol. 52, issue 1, No 10, 195-226

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: C61 D81 G02 G11 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s10614-017-9668-6

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