An Empirical Study for the Application of the Evidential Reasoning Rule to Decision Making in Financial Investment

  • Quanjian Gao

Student thesis: Doctor of Business Administration


The aim of this thesis is to explore the adaptability of the Evidential Reasoning (ER) Rule as a method to provide a useful supporting tool for helping investors make decisions on financial investments. Decision making in financial investment often involves conflicting information and subjective judgment of the investors. Accordingly, the ER Rule, extended from the original popular Evidential Reasoning algorithm and developed for MCDM (Multiple Criteria Decision Making), is particularly suited for handling conflicts in information and to allow for judgmental weighting on the sources of evidence.In order to do so, a specific EIA (Efficient Information Assessment) process modeled by the mass function of Dempster-Shafer Theory has been constructed such that the underlying architecture of the model satisfies the requirement of the ER rule. The fundamental concern is to define and assess "efficient information". For this purpose, a process denoted the Efficient Information Assessment (EIA) is defined which applies the mass function of Dempster-Shafer theory. Any relevant information selected from an expert's knowledge database is "efficient" if the data is fully in compliance with the requirement of the ER rule. The logical process of the EIA model proceeds with a set of portfolio strategies from the information recommended by top financial analysts. Then, as a result, the model enables the ER rule to make an evaluation of all strategies for helping investors make decisions. Experiments were carried out to back-test the investment strategy using data from the China Stock Market & Accounting Research (CSMAR) Database for the four-year period between 2009 and 2012. The data contained more than 270,000 reports from more than 4,600 financial analysts. The risk-adjusted average annual return of the strategy outperformed that of the CSI300 index by as much as 10.69% for an investment horizon of six months, with the p value from Student's t-test as low as 0.02%. The EIA model serves as the first successful application adapting the ER Rule for a new and effective decision-making process in financial investment, and this work is the only empirical study applying the ER Rule to the opinions of financial analysts, to the best of my knowledge.
Date of Award1 Aug 2017
Original languageEnglish
Awarding Institution
  • The University of Manchester
SupervisorDong Xu (Supervisor)


  • Decision Making, ER-MCDA, EIA Efficient Information Assessment, Financial Investment, Dempster-Shafer theory, ER Rule, Evidential Reasoning Rule, Financial Analysts, Investment Strategy, Experiments.

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