scholarly journals Irrational Diversification: An Examination of Individual Portfolio Choice

2011 ◽  
Vol 46 (5) ◽  
pp. 1463-1491 ◽  
Author(s):  
Guido Baltussen ◽  
Gerrit T. Post
Keyword(s):  
Laboratory Experiment ◽  
Portfolio Choice ◽  
Strong Evidence ◽  
Stochastic Dominance ◽  
Marginal Distribution ◽  
Substantial Influence ◽  
Portfolio Decisions ◽  
First Order ◽  
Order Stochastic Dominance ◽  
Problem Presentation

AbstractWe study individual portfolio choice in a laboratory experiment and find strong evidence for heuristic behavior. The subjects tend to focus on the marginal distribution of an asset, while largely ignoring its diversification benefits. They follow a conditional 1/n diversification heuristic as they exclude the assets with an “unattractive” marginal distribution and divide the available funds equally between the remaining “attractive” assets. This strategy is applied even if it leads to allocations that are dominated in terms of first-order stochastic dominance and is clearly irrational. In line with these findings, we find that framing and problem presentation have substantial influence on portfolio decisions.

scholarly journals The concept of stochastic dominance in ranking investment alternatives

2005 ◽  
Vol 50 (164) ◽  
pp. 135-149
Author(s):  
Dejan Trifunovic
Keyword(s):  
Stochastic Dominance ◽  
Distribution Functions ◽  
Third Order ◽  
Ranking Problem ◽  
First Order ◽  
Order Stochastic Dominance ◽  
Arbitrage Opportunities ◽  
Second Order Stochastic Dominance ◽  
Mean Variance ◽  
Almost Stochastic Dominance

In order to rank investments under uncertainty, the most widely used method is mean variance analysis. Stochastic dominance is an alternative concept which ranks investments by using the whole distribution function. There exist three models: first-order stochastic dominance is used when the distribution functions do not intersect, second-order stochastic dominance is applied to situations where the distribution functions intersect only once, while third-order stochastic dominance solves the ranking problem in the case of double intersection. Almost stochastic dominance is a special model. Finally we show that the existence of arbitrage opportunities implies the existence of stochastic dominance, while the reverse does not hold.

A Portfolio Optimality Test Based on the First-Order Stochastic Dominance Criterion

2009 ◽  
Vol 44 (5) ◽  
pp. 1103-1124 ◽  
Author(s):  
Miloš Kopa ◽  
Thierry Post
Keyword(s):  
Stochastic Dominance ◽  
New Approach ◽  
First Order ◽  
Value Stocks ◽  
Order Stochastic Dominance ◽  
Market Portfolio ◽  
The Face ◽  
Binary Choices ◽  
Return Distributions ◽  
Optimality Test

AbstractExisting approaches to testing for the efficiency of a given portfolio make strong parametric assumptions about investor preferences and return distributions. Stochastic dominance-based procedures promise a useful nonparametric alternative. However, these procedures have been limited to considering binary choices. In this paper we take a new approach that considers all diversified portfolios and thereby introduce a new concept of first-order stochastic dominance (FSD) optimality of a given portfolio relative to all possible portfolios. Using our new test, we show that the U.S. stock market portfolio is significantly FSD nonoptimal relative to benchmark portfolios formed on market capitalization and book-to-market equity ratios. Without appealing to parametric assumptions about the return distribution, we conclude that no nonsatiable investor would hold the market portfolio in the face of the attractive premia of small caps and value stocks.

SAMPLING ERROR IN FIRST ORDER STOCHASTIC DOMINANCE

1987 ◽  
Vol 10 (3) ◽  
pp. 259-268 ◽  
Author(s):  
William E. Stein ◽  
Roger C. Pfaffenberger ◽  
Dan W. French
Keyword(s):  
Stochastic Dominance ◽  
Sampling Error ◽  
First Order ◽  
Order Stochastic Dominance

scholarly journals On the existence of certainty equivalents of various relevant types

2003 ◽  
Vol 2003 (9) ◽  
pp. 447-458 ◽  
Author(s):  
J. C. R. Alcantud ◽  
G. Bosi
Keyword(s):  
Stochastic Dominance ◽  
Cooperative Games ◽  
Risk Attitudes ◽  
Translation Invariance ◽  
Certainty Equivalence ◽  
First Order ◽  
Certainty Equivalents ◽  
Order Stochastic Dominance ◽  
Positive Homogeneity ◽  
General Conditions

We tackle the problem of associating certainty equivalents with preferences over stochastic situations, which arises in a number of different fields (e.g., the theory of risk attitudes or the analysis of stochastic cooperative games). We study the possibility of endowing such preferences with certainty equivalence functionals that satisfy relevant requirements (such as positive homogeneity, translation invariance, monotonicity with respect to first-order stochastic dominance, and subadditivity). Uniqueness of the functional is also addressed in fairly general conditions.

Sign in / Sign up

Export Citation Format

Share Document