Minimax Behavior in Portfolio Selection

Some inefficiencies in traditional portfolio-selection theory are revealed and an alternative approach is suggested. The nontraditional theory introduced here makes the assumption that investors choose their portfolios to have a certain minimax property, which is described in detail. Results of the analysis show that the minimax portfolios end up being identical to portfolios that are constructed on different recommendations, thus lending more support to the minimax theory. Though minimax behavior is shown to be less than fully optimal, there is a strong rationale for its close approximation to the behavior of some investors. The most obvious reason is the strong discomfort many investors feel when basing their decisions on subjective probability distributions. Finally, support is provided for the appropriateness of minimax analysis of portfolio selection. Especially noted is the large amount of information an investor requires to determine probability distributions.