On The Foundations of Mean-Variance Analysis.
Abstract
It is well-known that choices among risky options that are based on means and variances of the probability distributions associated with the options encounter serious logical difficulties unless suitable restrictions are imposed on the relevant distributions. Despite this, clear statements of the logical implications of basic presuppositions of mean-variance analysis have not appeared in the literature. This report offers such statements for the context in which outcomes are not bounded, and the context in which all outcomes lie within a fixed finite interval. 'Reasonable' assumptions in the unbounded case imply a lexicographic choice model with means as the dominant factor and variances as the secondary factor. However, tradeoffs between mean and variance are possible in the bounded outcomes context although the slopes of the resultant tradeoff curves are restricted in a precisely described way.
Document Details
- Document Type
- Technical Report
- Publication Date
- Sep 01, 1975
- Accession Number
- ADA015315
Entities
People
- Peter C. Fishburn
Organizations
- Pennsylvania State University