Some properties of subjective probabilities induced by optimal expectations

Hideki Iwaki, Yusuke Osaki

Research output: Contribution to journalArticle

Abstract

In this paper, we examine the properties of subjective probabilities induced by optimal expectations. We show that investors who follow optimal expectations underweigh small probabilities and overweigh large probabilities in a simple binary economy. This indicates that the subjective probabilities induced by optimal expectations are incompatible with experimentally observed results under the rank dependent probability assumption.

Original languageEnglish
Pages (from-to)98-102
Number of pages5
JournalFinance Research Letters
Volume7
Issue number2
DOIs
Publication statusPublished - 2010 Jun 1

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Keywords

  • Optimal expectation
  • Portfolio choice
  • Subjective probability

ASJC Scopus subject areas

  • Finance

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