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Experiments On Portfolio Selection: A Comparison Between Quantile Preferences And Expected Utility Decision Models

Author

Listed:
  • Gabriel Montes-Rojas

    (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET)

  • Luciano de Castro

    (University of Iowa)

  • Antonio F. Galvao

    (Michigan State University)

  • Jeong Yeol Kim

    (University of Arizona)

  • José Olmo

    (Universidad de Zaragoza
    University of Southampton)

Abstract

This paper conducts a laboratory experiment to assess the optimal allocation under quantile preferences (QP) and compares the model predictions with those of a meanvariance (MV) utility function. We estimate the aversion coefficients associated to the individuals’ empirical portfolio under the QP and MV theories, and evaluate the relative predictive of each theory. The experiment assesses individuals’ preferences through a portfolio choice experiment constructed from two assets that may include a risk-free asset. The results of the experiment con rm the suitability of both to predict individuals’ optimal choices. Furthermore, the aggregation of results by individual choices o ers support to the MV theory. However, the aggregation of results by task, which is more informative, provides more support to the QP theory. The overall message that emerges from this experiment is that individuals’ behavior is better predicted by the MV model when it is di cult to assess the differences in the lotteries’ payoff distributions but better described as QP maximizers, otherwise.

Suggested Citation

  • Gabriel Montes-Rojas & Luciano de Castro & Antonio F. Galvao & Jeong Yeol Kim & José Olmo, 2021. "Experiments On Portfolio Selection: A Comparison Between Quantile Preferences And Expected Utility Decision Models," Documentos de trabajo del Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET) 2021-68, Universidad de Buenos Aires, Facultad de Ciencias Económicas, Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET).
    • Handle: RePEc:ake:iiepdt:202168
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    More about this item

    Keywords

    Optimal asset allocation; Quantile preferences; Portfolio theory; Risk attitude; Predictive ability test;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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