Investigating unpopularity of utility-based approaches in portfolio optimization; introducing an extension to the UTASTAR method

Document Type : Research Paper

Authors

School of Industrial Engineering, Iran University of Science and Technology, Tehran, Iran

Abstract

Despite the passing of more than 30 years from introducing the UTilitès-Additives (UTA) method and its extensive presentation in academic communities, this method is still not very popular among portfolio managers. Many portfolio managers still question the usefulness of the UTA method and prefer to rely on other multi-criteria decision making (MCDM) approaches. Therefore in this study, we examined the features of one of the most popular variants of the UTA methods, called UTASTAR, and on this basis, we have been developed this traditional approach in such a way that it would have more ability to meet the expectations of portfolio managers. In this way, to demonstrate how the proposed method can be applied in practice it is implemented in Tehran stock exchange (TSE) and to validate its efficiency, we designed an experiment, which is a novel approach in operations research but common in psychology and experimental economics. From the experimental results, we can extract that the outstanding features of the proposed method, compared to the original UTASTAR method are as follows: (1) it can provide a more accurate estimation of the portfolio managers’ attitude because in addition to the sequential preferences of the alternatives it also considers the relative preferences; (2) it has always feasible solutions although it requires more comparison data and (3) it allows portfolio managers to observe the inconsistency of their decisions and take corrective action if desired.0

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Main Subjects


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  • Receive Date: 10 April 2021
  • Revise Date: 26 July 2022
  • Accept Date: 27 July 2022
  • First Publish Date: 27 July 2022