IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v41y1995i9p1538-1548.html
   My bibliography  Save this article

Unreasonable Rationality?

Author

Listed:
  • Dana R. Clyman

    (Darden Graduate School of Business, University of Virginia, Charlottesville, Virginia 22906)

Abstract

This paper explores how fractional demands (the optimal fraction of wealth invested in a security) change upon exogenous changes in security returns and wealth. In the first part of the paper, the analysis is conducted in an Arrow-Debreu framework. Here we demonstrate the counterintuitive but completely rational result that fractional demands can remain unchanged or in fact decrease upon an exogenous increase in return. Furthermore, we show that this can occur without any offsetting wealth effect. In the second part of the paper, we apply these results to ordinary securities (those composed of fixed portfolios of Arrow-Debreu securities). Here we derive a complete analytical solution and show that portfolio managers should beware. Even correct information that the return from holding an underlying pure security will improve is not sufficient to conclude that one should increase (or decrease) one's holdings of any particular stock.

Suggested Citation

  • Dana R. Clyman, 1995. "Unreasonable Rationality?," Management Science, INFORMS, vol. 41(9), pages 1538-1548, September.
    • Handle: RePEc:inm:ormnsc:v:41:y:1995:i:9:p:1538-1548
    DOI: 10.1287/mnsc.41.9.1538
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.41.9.1538
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.41.9.1538?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gelles, Gregory M. & Mitchell, Douglas W., 2002. "Increasingly mean-seeking utility functions and n-asset portfolios," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(5), pages 911-919.
    2. Walls, Michael R & Clyman, Dana R, 1998. "Risky choice, risk sharing and decision analysis: Implications for managers in the resource sector," Resources Policy, Elsevier, vol. 24(1), pages 49-57, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:41:y:1995:i:9:p:1538-1548. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.