Portfolio Choice Under Ambiguity

This paper provides an intersection between portfolio choice theory and the elicitation of preferences under uncertainty. Theories of financial markets build on portfolio choice theory, which generally assumes that preferences are of a particularly simple kind, while research on preferences has revealed that people have more sophisticated preferences. This paper brings the two fields together by investigating, in a portfolio choice context, the preferences that are revealed by decisions. We frame the problem as one under ambiguity, where the probabilities of the states of the world are not known to the decision-maker. This enables us to compare the performance of some recent theories of behaviour under ambiguity as well as traditional ones (such as MeanVariance) from the theory of finance. We also identify a ‘rule of thumb’ that decision-makers may be using in this complex scenario. This research may help us to understand more fully actual portfolio choice decisions.