Download Adequate Decision Rules for Portfolio Choice Problems by T. Goodall PDF

By T. Goodall

The writer provides the idea of portfolio selection from a brand new viewpoint, recommending choice ideas that experience merits over these presently utilized in conception and perform. Portfolio selection idea is determined by anticipated values. Goodall argues that this dependence has a historic foundation and argues that present choice principles are insufficient for many portfolio selection events. Drawing on econometric options proposed for the matter of forecasting results of an opportunity scan, the writer defines adequacy standards, and proposes sufficient choice principles for various situations.

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Additional resources for Adequate Decision Rules for Portfolio Choice Problems

Example text

Keeping in mind that problems of prediction are inherent in problems of decision under Knightian risk, combining the two parameters into one decision rule is thus more than plausible. 39 chapter three A N A LY S I S O F P R O M I N E N T DECISION RULES A D E Q U AT E D E C I S I O N R U L E S F O R PORTFOLIO CHOICE PROBLEMS But it is plausible only if the investment is repeated an infinite number of times, since underneath Markowitz’s decision rule lies the expected value of the random variable (R – E[R])2.

Expected utility analysis has established two major lines of research. 7 Its influence was such that for a long time a decision rule could only be declared ‘rational’ by its proponents, if it complied with the expected utility’s axioms. The other line of research treated the expected utility principle as descriptive, and exposed it to empirical analysis. Serving both normative and descriptive analysis has undoubtedly contributed to its predominant role. On the other hand, its serving two masters has caused the expected utility principle to become a prime example of the continuing blurring of normative and descriptive decision theory.

The second approach has since Roy (1952) been called the ‘safety first approach’. Safety first rules emphasise those results of a gamble that might or should be considered ‘disastrous’ by the individual. Decision rules are considered ‘reasonable and probable in practice’,4 if they lead to a reduction as far as possible of the chances of a catastrophic occurrence. Thus, instead of relying on parameters alone, safety first rules utilise at least some of the information the distribution function provides on specific results and their probabilities.

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