Navigating the Cognitive Process: A Single Equation That Explains, Guides and Unifies Portfolio Decision Making

Publisher: Working Paper

Abstract:

Cheung (2023) presents a new understanding of investor portfolio-decision behaviours, showing that they seek Pareto and subjective information (double) efficiencies, and envisages the need for future portfolio theory to navigate investors through their cognitive views and portfolio discovery. Through a decomposition of the Cheung (2012) ABL model, this paper derives a comprehensive yet parsimonious portfolio theory with explanatory, unifying and guiding powers over practices. This behaviour-consistent theory blends natural investor views into an information distribution and maps it into a portfolio with guaranteed double efficiencies. By efficiently blending both human view inputs and portfolio analytic feedback, the theory scientifically navigates the investor through their views and best-fit portfolio discovery.

Source: Manual