Title :
Continuous-time behavioral portfolio selection
Author :
Jin, Hanqing ; Zhou, Xun Yu
Author_Institution :
Math. Inst., Univ. of Oxford, Oxford, UK
Abstract :
This paper formulates and studies a general continuous-time behavioral portfolio selection model under Kahneman and Tversky¿s (cumulative) prospect theory, featuring S-shaped utility (value) functions and probability distortions. The optimal terminal wealth positions, derived in fairly explicit forms, possess surprisingly simple structure: they resemble the payoff of a portfolio of two binary (or digital) options written on the state density price. An example with a two-piece CRRA utility is presented to illustrate the general results obtained, and is solved completely for all installations of the parameters. The effect of the behavioral criterion on the risky allocations is finally discussed.
Keywords :
continuous time systems; investment; S-shaped utility functions; continuous-time behavioral portfolio selection; probability distortions; state density price; Asset management; Decision making; Dynamic programming; Humans; Nonlinear distortion; Portfolios; Psychology; Stochastic processes; Uncertainty; Utility theory;
Conference_Titel :
Decision and Control, 2008. CDC 2008. 47th IEEE Conference on
Conference_Location :
Cancun
Print_ISBN :
978-1-4244-3123-6
Electronic_ISBN :
0191-2216
DOI :
10.1109/CDC.2008.4738833