Can anyone please tell me whats the importance of decision theory? I dont get whats the use of this discussion.
When someone doesn’t understand an investment and then sells at the worst time at high cost. Think about a novice investor in a private equity fund. He may not know that it is expected that the “value” of the fund may be lower after a couple years before moving higher at liquidation. They may sell at a loss and not wait the time necessary for the fund to move to a profit. This decision risk. Longer time horizons and short term volitility increase this risk as does misunderstanding by investors
You are talking about decision risk thats covered in alternate investments but i am referring to decision theory from behavioural finance…
That’s not comforting since I have no idea what you are referring to
Its the base, or TF, perspective of how people SHOULD make decisions. ie. They will use probabilities to arrive at the optimal decision. They are rational, and have all information available to them, fully informed.
David Heatherington of Kaplan specifically mentioned that it is not very important. Ill memorize the bullet points this week then never care about it again.
I don’t think it’s covered in alternative investments, that’s just the example they use in the behavioural finance reading…
Decision theory = REM, full information, rationally calculated optimal decisions