In this paper, Dr. Zahan shows how the traditional investment framework, based on variance and reward/risk metrics, induces allocators to make investment decisions that are in fact contrary to their organizations’ interests. This antagonism, which we call utility incompatibility, can be easily grasped from real-life examples.
In response, we propose a framework for portfolio optimization and investment selection which is utility-based. Among other features, making decisions based on utility criteria makes practical sense for stakeholders and can be easily fine-tuned by each organization.