A Comparison of Portfolio Theory and Weighted Utility Models of Risky Decision Making
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چکیده
Weighted utility models attempt to account for risk preferences in terms of an expectation-like equation applied to the subjective evaluation of probabilities and outcomes, while Portfolio theory assumes that risk preference is a function of expected value and perceived risk. A pair of empirical predictions which contrasts Portfolio theory with all weighted utility models is derived and tested. Results indicate that both theories are in error. In the case of Portfolio theory, it is clearly the axiom of single-peakedness over risk that is violated.
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