Chapter 2: Decision Theory

This chapter aims to lay the foundation for the entire book. It focuses on three renowned models of decision theory: mean-variance analysis, expected utility theory, and prospect theory. The chapter shows how these theories differ and how to apply them to private banking.

The chapter is structured as follows.

2.1. Introduction
2.2. Mean-variance analysis
2.3. Expected utility theory
2.4. Prospect theory
2.5. Prospect theory and the optimal asset allocation
2.6. A critical view on mean-variance theory
2.7. A critical view on expected utility axioms
2.8. Comparison of expected utility, prospect theory, and mean-variance analysis