AN OVERVIEW OF MODERN DECISION-THEORETIC APPROACHES IN INVESTMENT MANAGEMENT

We analyze and discuss the standard portfolio approach in light of recent development in decision theory and behavioral economics. We point out problems when applying Kahneman-Tversky cumulative prospect theory to portfolio choice namely irrationality of investors. We suggest a framework based on robust decision making that might explain S-shaped probability weighting. We conclude by suggesting different future research questions to apply empirically relevant decision-theoretic approaches to portfolio choice.