The Test of Mean-Variance Approximations to Non-Expected Utility
نویسنده
چکیده
This article tests the performance of the mean-variance approximations to non-expected utility functions. Previous studies justify mean-variance analysis only in the context of expected utility theory by demonstrating the excellent empirical performance of the mean-variance approximations to two of the commonly used utility functions in the study of expected utility: the power and exponential utility functions. The question we ask is whether the same performance holds in a non-expected utility framework. We demonstrate that the mean-variance approximations do not perform well for the s-shaped utility function of prospect theory.
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