Recent developments in the theory of choice under uncertainty and risk yield a pessimistic decision theory that replaces the classical expected utility criterion with a Choquet expectation that accentuates the likelihood of the least favorable outcomes. A parallel theory has recently emerged in the literature on risk assessment. It is shown that a general form of pessimistic portfolio optimization based on the Choquet approach may be formulated as a problem of linear quantile regression.
Pessimistic portfolio allocation and Choquet expected utility
Gilbert W. Bassett Jr Bassett, Roger Koenker, Gregory Kordas
7 June 2004
Working Paper (CWP09/04)