Optimal rules for ordering uncertain prospects

Bawa, Vijay S.

doi:10.1016/0304-405x(75)90025-2

Cited by 681 publications

(352 citation statements)

References 25 publications

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“…3 The function g embodies the investor's aversion toward downside losses (x < a), while the function f represents a standard risk averse utility function. The constant a is called the reference level.…”

Section: Downside Loss Averse Utility Functionsmentioning

confidence: 99%

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Downside Loss Aversion and Portfolio Management

Jarrow

Zhao

2005

SSRN Journal

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Downside loss averse preferences have seen a resurgence in the portfolio management literature. This is due to the increasing usage of derivatives in managing equity portfolios, and the increased usage of quantitative techniques for bond portfolio management. We employ the lower partial moment as a risk measure for downside loss aversion, and compare mean-variance (M-V) and mean-lower partial moment (M-LPM) optimal portfolios under non-normal asset return distributions. When asset returns are nearly normally distributed, there is little difference between the optimal M-V and M-LPM portfolios. When asset returns are non-normal with large left tails, we document significant differences in M-V and M-LPM optimal portfolios. This observation is consistent with industry usage of M-V theory for equity portfolios, but not for fixed income portfolios.

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Section: Downside Loss Averse Utility Functionsmentioning

confidence: 99%

“…Parallel to M-V analysis, M-LPM analysis can be studied by considering a two-parameter efficient frontier (see Bawa (1975), Bawa and Lindenberg (1977), and Harlow and Rao (1989)). The M-LPM n efficient frontier is the solution to expression (12) for different (a, µ).…”

Section: The Portfolio Optimization Problemmentioning

confidence: 99%

Downside Loss Aversion and Portfolio Management

Jarrow

Zhao

2005

SSRN Journal

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“…This development in decision theory has been accompanied by an independent movement in the finance theory literature where lower partial moments (LPMs) have found renewed interest after their introduction by Bawa (1975). While the concentration on two moments of a return distribution has been a cornerstone of neoclassic finance theory since its beginnings (Markowitz 1952) an alternative's mean and variance have been selected more by convenience and ease of computation than by theoretical or empirical justification.…”

Section: Introductionmentioning

confidence: 99%

Lower partial moments as measures of perceived risk: An experimental study

Unser¹

2000

Journal of Economic Psychology

121

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Abstract:The paper reports the results of an experiment on individual investors' risk perception in a stock market context under two different modes of information presentation (framings). While the concentration on two moments of a return distribution has been a cornerstone of neo-classic finance theory from the start (Markowitz 1952) an alternative's mean and variance have been selected more by convenience and ease of computation than by theoretical or empirical justification. Even though the most influential models are based on variance as risk measure there has always been much discontent with this proposal. The symmetrical nature of variance does not capture the common notion of risk as something undesired, e. g. negative deviations from a reference point. Instead, lower partial moments (LPM) seem to be more appropriate for measuring risk. The purpose of this paper is to examine experimentally private investors' risk perception in a financial context. The focus is on the correspondence of people's risk perceptions with specific LPMs. The main findings can be summarized as follows. First, symmetrical risk measures like variance can be clearly dismissed in favor of shortfall measures like LPMs. Second, the reference point (target) of individuals for defining losses is not a distribution's mean but the initial price in a time series of stock prices. Third, the LPM which explains risk perception best is the LPM 0 , i. e. the probability of loss. Fourth, the framing of price distributions (histograms versus charts) exerts a significance influence on average risk ratings, the latter being higher for the histogram framing. Fifth, positive deviations from an individual reference point tend to decrease perceived risk.

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“…On trouvera dans Bawa (1975), ou Whitmore et Findlay (1978, par exemple, les théorèmes montrant la correspondance biunivoque entre les règles de dominance du 1° ordre (FSD), 2° ordre (SSD) ou 3° ordre (TSD) et la règle du maximum de Eu pour certaines classes de fonctions d'utilité, et partant certains comportements généraux des décideurs. L'essentiel est que la règle FSD apparaît comme une exigence minimale de comportement : tout investisseur qui désire toujours plus de richesse doit s'y conformer rationnellement; la règle SSD y ajoute l'aversion généralisée au risque et ne correspond donc plus à l'unanimité des comportements.…”

Section: Ga (Y) < ^B [Y)> P Our Au M°ins Un E Vcdeur De Yunclassified

Prenons-nous assez de risque dans les théories du risque?

Colson

2009

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Un survol limité du concept du risque chez les praticiens nous révèle neuf caractéristiques du risque, tandis que les théoriciens s’intéressent surtout à la réduction des écarts entre les prédictions du paradigme de l’espérance d’utilité et le comportement des décideurs. Le foisonnement des nouvelles théories du risque n’incorporent pourtant pas assez de composantes du risque. Enfin, la dernière section de ce papier envisage une nouvelle théorie du risque : dans cette théorie bipolaire, le risque vectoriel peut bénéficier d’une approche multicritère.A short overview of how risk is conceived by practitioners reveals nine features of risk while theoreticians worry more about the way of solving the discrepancies between the predictions of the expected utility paradigm and the actual behaviour of people. Anyway, quickly expanding new theories of risk do not encompass enough components of risk. The last section of this paper is devoted to the new bipolar theory of risk proposed by the author, where risk is a vector and could benefit from a multicriterion approach

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Optimal rules for ordering uncertain prospects

Cited by 681 publications

References 25 publications

Downside Loss Aversion and Portfolio Management

Downside Loss Aversion and Portfolio Management

Lower partial moments as measures of perceived risk: An experimental study

Prenons-nous assez de risque dans les théories du risque?

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