Economically relevant preferences for all observed epsilon

The common investment decision rules, Markowitz’s Mean-Variance (MV) rule and the non-parametric Stochastic Dominance (SD) rules, suffer from one severe drawback: there are pairs of prospects where experimentally 100% of the subjects choose one prospect, yet these rules are unable to rank the two pr...

Full description

Saved in:
Bibliographic Details
Published in:Annals of operations research 2010-04, Vol.176 (1), p.153-178
Main Authors: Levy, Haim, Leshno, Moshe, Leibovitch, Boaz
Format: Article
Language:English
Subjects:
Analysis
Business and Management
Combinatorics
Decision analysis
Decision-making
Investors
Operations research
Operations Research/Decision Theory
Preferences
Probability
Studies
Theory of Computation
Utility functions
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The common investment decision rules, Markowitz’s Mean-Variance (MV) rule and the non-parametric Stochastic Dominance (SD) rules, suffer from one severe drawback: there are pairs of prospects where experimentally 100% of the subjects choose one prospect, yet these rules are unable to rank the two prospects—a paradoxical result. Thus, the set of all preferences corresponding to these decision rules is too large, because it contains theoretical preferences that are not encountered in practice. Based on 400 subjects’ choices we define the economically relevant set of preference and the corresponding new decision rules, which avoid the paradoxical results. The results are very robust and are almost unaffected by the magnitude of the outcomes and the structure of the prospects under consideration.
ISSN:0254-5330
1572-9338
DOI:10.1007/s10479-008-0470-7