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Satisficing Measures for Analysis of Risky Positions

Author

Listed:
  • David B. Brown

    () (Fuqua School of Business, Duke University, Durham, North Carolina 27705)

  • Melvyn Sim

    () (NUS Business School, NUS Risk Management Institute, and Singapore MIT Alliance (SMA), National University of Singapore, Singapore 117592)

Abstract

In this work we introduce a class of measures for evaluating the quality of financial positions based on their ability to achieve desired financial goals. In the spirit of Simon (Simon, H. A. 1959. Theories of decision-making in economics and behavioral science. Amer. Econom. Rev. 49(3) 253-283), we call these measures satisficing measures and show that they are dual to classes of risk measures. This approach has the advantage that aspiration levels, either competing benchmarks or fixed targets, are often much more natural to specify than risk tolerance parameters. In addition, we propose a class of satisficing measures that reward diversification. Finding optimal portfolios for such satisficing measures is computationally tractable. Moreover, this class of satisficing measures has an ambiguity interpretation in terms of robust guarantees on the expected performance because the underlying distribution deviates from the investor's reference distribution. Finally, we show some promising results for our approach compared to traditional methods in a real-world portfolio problem against a competing benchmark.

Suggested Citation

  • David B. Brown & Melvyn Sim, 2009. "Satisficing Measures for Analysis of Risky Positions," Management Science, INFORMS, vol. 55(1), pages 71-84, January.
  • Handle: RePEc:inm:ormnsc:v:55:y:2009:i:1:p:71-84
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    File URL: http://dx.doi.org/10.1287/mnsc.1080.0929
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    References listed on IDEAS

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    1. Robert J. Aumann & Roberto Serrano, 2008. "An Economic Index of Riskiness," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 810-836, October.
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Stergios Athanasoglou & Valentina Bosetti & Laurent Drouet, 2017. "A Simple Framework for Climate-Change Policy under Model Uncertainty," Working Papers 2017.13, Fondazione Eni Enrico Mattei.
    2. David B. BROWN & Enrico G. DE GIORGI & Melvyn SIM, "undated". "A Satiscing Alternative to Prospect Theory," Swiss Finance Institute Research Paper Series 09-19, Swiss Finance Institute.
    3. Enrico G. De Giorgi, 2009. "Goal-Based Investing with Cumulative Prospect Theory and Satisficing Behavior," University of St. Gallen Department of Economics working paper series 2009 2009-22, Department of Economics, University of St. Gallen.
    4. William B. Haskell & Wenjie Huang & Huifu Xu, 2018. "Preference Elicitation and Robust Optimization with Multi-Attribute Quasi-Concave Choice Functions," Papers 1805.06632, arXiv.org.
    5. repec:spr:annopr:v:253:y:2017:i:1:d:10.1007_s10479-016-2299-9 is not listed on IDEAS
    6. Balbás, Raquel & Balbás, Beatriz, 2011. "CAPM-like formulae and good deal absence with ambiguous setting and coherent risk measure," INDEM - Working Paper Business Economic Series id-11-04, Instituto para el Desarrollo Empresarial (INDEM).
    7. Balbás, Alejandro & Balbás, Raquel & Balbás, Beatriz, 2016. "Coherent Pricing," INDEM - Working Paper Business Economic Series 22932, Instituto para el Desarrollo Empresarial (INDEM).
    8. Cillo, Alessandra & Delquié, Philippe, 2014. "Mean-risk analysis with enhanced behavioral content," European Journal of Operational Research, Elsevier, vol. 239(3), pages 764-775.
    9. repec:eee:riibaf:v:42:y:2017:i:c:p:509-521 is not listed on IDEAS
    10. Balbás, Alejandro & Balbás, Beatriz & Balbás, Raquel, 2016. "Good deals and benchmarks in robust portfolio selection," European Journal of Operational Research, Elsevier, vol. 250(2), pages 666-678.
    11. repec:eee:jbrese:v:82:y:2018:i:c:p:127-140 is not listed on IDEAS
    12. Schulze, Klaas, 2014. "Existence and computation of the Aumann–Serrano index of riskiness and its extension," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 219-224.
    13. Enrico G. De Giorgi & David B. Brown & Melvyn Sim, 2010. "Dual representation of choice and aspirational preferences," University of St. Gallen Department of Economics working paper series 2010 2010-07, Department of Economics, University of St. Gallen.
    14. Balbás, Alejandro & Balbás, Beatriz & Balbás, Raquel, 2010. "CAPM and APT-like models with risk measures," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1166-1174, June.
    15. Jiang, J. & Ng, K.M. & Teo, K.M., 2016. "Satisficing measure approach for vehicle routing problem with time windows under uncertaintyAuthor-Name: Nguyen, V.A," European Journal of Operational Research, Elsevier, vol. 248(2), pages 404-414.
    16. David B. Brown & Enrico De Giorgi & Melvyn Sim, 2012. "Aspirational Preferences and Their Representation by Risk Measures," Management Science, INFORMS, vol. 58(11), pages 2095-2113, November.
    17. Balbás, Alejandro & Balbás, Raquel & Balbás, Beatriz, 2013. "On the inefficiency of Brownian motions and heavier tailed price processes," INDEM - Working Paper Business Economic Series id-13-01, Instituto para el Desarrollo Empresarial (INDEM).

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