Apocalypse Revisited: Do You Know Where Your Optimizer Is at Night?

David N. Nawrocki
December 1996
Journal of Financial Planning;Dec1996, Vol. 9 Issue 6, p68
Academic Journal
The article focuses on portfolio theory. While such terms as modern theory, post-modern portfolio theory, asset allocation and portfolio optimization entering the technical vocabulary of investment managers are confusing. Portfolio theory is rich, containing mathematical algorithms, statistical analysis, risk measures, utility theory, expectations and investor behavior. Portfolio theory is simply a toolbox of statistical and mathematical tools trying to improve investment decision-making under risk or uncertainty. Portfolio theory could allow an investment manager to provide consistent professional advice to every client. Potentially, it can economically deliver sound, consistent investment advice to the dollar 5,000 to dollar 50,000 account. The real problem with portfolio theory derives from Godel's Incompleteness Theorem that states chat a mathematical algorithm cannot prove its own validity. Translated, this means that there can never be final best system of mathematics. Every mathematical system eventually will run into certain simple problems that it cannot solve. At this point, one has to rely on human experience and intuition to handle the problem.


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