Adequate Decision Rules for Portfolio Choice

Abstract

Normative decision rules are commonly deemed reasonable for decisions under Knightian risk if and only if they comply with the EU principle and obey the EU principle’s definition of ‘rationality’. This convention has been criticised here. Normative ideals are but mere convictions on how individuals should make a decision, and convictions cannot be justified conclusively. Terms like ‘rationality’ and ‘plausibility’, frequently used to justify or refute specific decision rules, are empty phrases. Meaning is given to them solely by opinion. No arguments can be provided to make a decision rule accepted as ‘rational’ by any two people not sharing the same opinion on rationality, especially no reference to logic or to any framework deducible from it. Discussions on which decision rule should be accepted as ‘rational’ thus cannot reach any conclusion. Any decision rule may be labelled ‘rational’ and recommended. Judging decision rules by their congruence with the EU principle is thus futile. There is no reason to necessarily accept the EU principle as the yardstick for ‘rationality’.