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Comparison of Mean-Variance Theory and Expected-Utility Theory through a Laboratory Experiment

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  • Andrea Morone

    (University of Bari)

Abstract

In the 40.s and early 50. two decision theories were proposed and have since dominated the scene of the fascinating field of decision-making. In 1944 . when von Neumann and Morgenstern showed that if preferences are consistent with a set of axioms then it is possible to represent these preferences by the expectation of some utility function . Expected Utility theory provides a natural way to establish .measurable utility.. In the early 50.s Markowitz introduced the Mean-Variance theory that is the basis of modern portfolio selection theory. Even if both models were analyzed from virtually all possible points of view; although they were tested against several generalizations; even though they seem to be the most attractive theories of decision making, they were never tested against each other. This paper will try to fill this gap. It investigates, using experimental data, which of these two models represent a better approximation of subjects. preferences.

Suggested Citation

  • Andrea Morone, 2007. "Comparison of Mean-Variance Theory and Expected-Utility Theory through a Laboratory Experiment," SERIES 0019, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Oct 2007.
    • Handle: RePEc:bai:series:economia-series19
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    References listed on IDEAS

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    Cited by:

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    5. Morone, Andrea & Temerario, Tiziana, 2015. "Eliciting Preferences Over Risk: An Experiment," MPRA Paper 68519, University Library of Munich, Germany.
    6. Zonna, Davide, 2016. "Sprechi di cibo e tentativi di riduzione. Un caso sperimentale [Avoiding food waste. A field experiment]," MPRA Paper 76097, University Library of Munich, Germany.
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    9. Dolors Berga & Jose I. Silva, 2021. "Risk-Free Versus Risky Assets: Teaching a Portfolio Model with Application to the Stock Market," Journal of Economics Teaching, Journal of Economics Teaching, vol. 6(2), pages 76-94, October.
    10. Temerario, Tiziana, 2014. "Individual and Group Behaviour Toward Risk: A Short Survey," MPRA Paper 58079, University Library of Munich, Germany.
    11. Yumi Oum & Shmuel S. Oren, 2010. "Optimal Static Hedging of Volumetric Risk in a Competitive Wholesale Electricity Market," Decision Analysis, INFORMS, vol. 7(1), pages 107-122, March.
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    More about this item

    Keywords

    Expected utility; Mean variance; preference functional; pair wise choice;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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