Cumulative prospect theory and mean–variance analysis: a rigorous comparison

Hens, Thorsten; Mayer, János

doi:10.21314/jcf.2017.336

Cited by 6 publications

(4 citation statements)

References 34 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…In this manner, an agent will prefer portfolios with higher financial and sustainable values. The set of non-dominated solutions to problem (11)…”

Section: Definition 21mentioning

confidence: 99%

“…In this paper, we consider two evolutionary algorithms to solve the above optimization problems, which are nonlinear and non-smooth. More specifically, to tackle the single-objective problems ( 8), ( 9), we employ a genetic algorithm (GA), while for the bi-objective one (11), we implement the iNSGA-II developed by (Kaucic et al, 2019). In Figure 2, we report the flowcharts of the two solvers.…”

Section: Description Of the Optimizersmentioning

confidence: 99%

“…(Pirvu and Schulze, 2012) have considered how PT-investors allocate their wealth in a single period between a riskless bond and multiple risky assets. (Hens and Mayer, 2017) have compared the financial performance of the CPT-based asset allocation strategy to the classical mean-variance portfolio. (Consigli et al, 2019) have performed a sensitivity analysis of the impact of CPT parameters on the mean-risk efficient frontier.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Optimal Portfolio with Sustainable Attitudes under Cumulative Prospect Theory

Kaucic¹,

Piccotto²,

Sbaiz³

et al. 2023

Journal of Applied Finance &Amp; Banking

View full text Add to dashboard Cite

In the last five years, extreme events such as the COVID-19 pandemic and the Ukrainian crisis have highlighted the importance of corporate social responsibility and sustainable principles. Consequently, the investment process is changing toward more ethical choices. In this context, we extend the classical optimization framework under the cumulative prospect theory (CPT) in two directions. We first consider an agent who maximizes a financial CPT-value function preselecting the assets to be included in the portfolio based on their environmental, social, and governance (ESG) scores. Then, we develop a bi-objective model that optimizes financial and sustainable CPT-value functions at the same time. Numerical results obtained on an investable universe from the constituents of the STOXX Europe 600 show that introducing ESG information improves the portfolio’s financial performance. JEL classification numbers: C63, G11, G17. Keywords: Cumulative prospect theory, ESG scores, portfolio optimization, genetic algorithm, European stock exchange.

show abstract

“…In this manner, an agent will prefer portfolios with higher financial and sustainable values. The set of non-dominated solutions to problem (11)…”

Section: Definition 21mentioning

confidence: 99%

Section: Description Of the Optimizersmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Optimal Portfolio with Sustainable Attitudes under Cumulative Prospect Theory

Kaucic¹,

Piccotto²,

Sbaiz³

et al. 2023

Journal of Applied Finance &Amp; Banking

View full text Add to dashboard Cite

show abstract

“…It can be concluded that human judgments have individual preferences. Prospect theory has established a successful model to simulate the psychological and behavioral characteristics of human beings, which has been widely applied in the field of engineering [27][28][29], economics [30][31][32], computer science [33][34][35], and so on. This provides a convincing explanation of the fact that the results of subjective empowerment do not conform to reality.…”

Section: Related Workmentioning

confidence: 99%

A Construction Schedule Robustness Measure Based on Improved Prospect Theory and the Copula-CRITIC Method

Zhao

Wang

et al. 2020

Applied Sciences

View full text Add to dashboard Cite

A robustness measure is an effective tool to evaluate the anti-interference capacity of the construction schedule. However, most research focuses on solution robustness or quality robustness, and few consider a composite robustness criterion, neglecting the bounded rationality of subjective weights and inherent importance and nonlinear intercriteria correlations of objective weights. Therefore, a construction schedule robustness measure based on improved prospect theory and the Copula-criteria importance through intercriteria correlation (CRITIC) method is proposed. Firstly, a composite robustness criterion is established, including start time deviation rs and structural deviation rp for measuring solution robustness from project execution and completion probability rc for measuring quality robustness from the project result. Secondly, bounded rationality is considered, using prospect theory to calculate subjective weights, which is improved by the interval distance formula. Thirdly, the Copula-CRITIC method is proposed to determine objective weights incorporating both inherent importance and nonlinear intercriteria correlations. Finally, an information-entropy-based evidence reasoning method is applied to combine subjective and objective weights together while identifying their validity. An underground power station in China is used for a case study, whose robustness is measured using the proposed methods, single robustness criterion, and composite robustness criterion using traditional weighting methods. The comparison results verify the consistency, representativeness, and advantage of the proposed criterion and methods.

show abstract