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The fallacy of large numbers revisited: The construction of a utility function that leads to the acceptance of two games, while one is rejected

Author

Listed:
  • P de Brouwer

    (Fortis Investment Management)

  • F van den Spiegel

    (Chief Economist of Fortis Bank, Professor at the Free University of Brussels, and Member of the Executive Committee of Association Belge des OPC)

Abstract

Should the composition of an investment portfolio differ depending on whether the investment horizon is longer or shorter? Practitioners have always allocated more risky investments to portfolios with longer investment horizons. But in 1963, P. A. Samuelson put forward strong arguments that this is an erroneous approach. Since then, the financial community has lived with this conflict and searched for plausible explanations. In this paper, however, we construct a counterexample to the thesis of 1963.

Suggested Citation

  • P de Brouwer & F van den Spiegel, 2001. "The fallacy of large numbers revisited: The construction of a utility function that leads to the acceptance of two games, while one is rejected," Journal of Asset Management, Palgrave Macmillan, vol. 1(3), pages 257-266, January.
    • Handle: RePEc:pal:assmgt:v:1:y:2001:i:3:d:10.1057_palgrave.jam.2240020
    DOI: 10.1057/palgrave.jam.2240020
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    Cited by:

    1. Dierkes, Maik & Erner, Carsten & Zeisberger, Stefan, 2010. "Investment horizon and the attractiveness of investment strategies: A behavioral approach," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1032-1046, May.
    2. Philippe J S De Brouwer, 2009. "Maslowian Portfolio Theory: An alternative formulation of the Behavioural Portfolio Theory," Journal of Asset Management, Palgrave Macmillan, vol. 9(6), pages 359-365, February.

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