Model Risk and Disappointment Aversion

60 Pages Posted: 30 Jul 2018 Last revised: 1 Oct 2019

See all articles by Hasan Fallahgoul

Hasan Fallahgoul

Monash University

Loriano Mancini

USI Lugano - Institute of Finance; Swiss Finance Institute

Stoyan V. Stoyanov

Charles Schwab

Date Written: August 27, 2019


Extensions of expected utility theory are sensitive to the tail behavior of the portfolio return distribution and may not be approximated reliably through higher-order moment expansions.
We develop a novel approach for model risk assessment based on a projection method and apply it to portfolio construction. We provide an extensive out-of-sample analysis to explore the economic gains of incorporating non-normality about financial asset returns into utility maximization with the generalized disappointment aversion (GDA) preferences. We find that the marginal utility gains of the optimal portfolio of a GDA investor are remarkably robust to misspecifications in the marginal distributions but are very sensitive to the structural assumption of stock returns implemented through a factor model.

Keywords: model risk, choice under uncertainty, optimal portfolios, generalized disappointment aversion, higher-order moments

JEL Classification: C5, G12

Suggested Citation

Fallahgoul, Hasan A and Mancini, Loriano and Stoyanov, Stoyan Veselinov, Model Risk and Disappointment Aversion (August 27, 2019). Swiss Finance Institute Research Paper No. 18-65, Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, 31st Australasian Finance and Banking Conference 2018, Available at SSRN: or

Hasan A Fallahgoul (Contact Author)

Monash University ( email )

Clayton Campus
Victoria, 3800


Loriano Mancini

USI Lugano - Institute of Finance ( email )

Via Giuseppe Buffi 6
6904 Lugano, CH-6904
+41 (0)91 912 46 47 (Fax)


Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Stoyan Veselinov Stoyanov

Charles Schwab ( email )

101 Montgomery Street (120K-15)
San Francisco, CA 94104
United States

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