Comparison of Mean-Variance Theory and Expected-Utility Theory through a Laboratory Experiment
AbstractIn 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.
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Bibliographic InfoPaper provided by Max Planck Institute of Economics, Strategic Interaction Group in its series Papers on Strategic Interaction with number 2005-20.
Length: 16 pages
Date of creation: Jul 2005
Date of revision:
Other versions of this item:
- Andrea Morone, 2008. "Comparison of Mean-Variance Theory and Expected-Utility Theory through a Laboratory Experiment," Economics Bulletin, AccessEcon, vol. 3(40), pages 1-7.
- Andrea Morone, 2004. "Comparison of Mean-Variance theory and Expected-Utility theory through a Laboratory Experiment," Experimental 0402001, EconWPA.
- Andrea Morone, 2007. "Comparison of Mean-Variance Theory and Expected-Utility Theory through a Laboratory Experiment," series 0019, Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari, revised Oct 2007.
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-08-13 (All new papers)
- NEP-EXP-2005-08-13 (Experimental Economics)
- NEP-FIN-2005-08-13 (Finance)
- NEP-HPE-2005-08-13 (History & Philosophy of Economics)
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Papers on Strategic Interaction
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