Dynamic consumption and portfolio choice under prospect theory

Bilsen, Servaas van; Laeven, Roger J. A.

doi:10.1016/j.insmatheco.2020.02.004

Cited by 13 publications

(5 citation statements)

References 69 publications

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“…Moreover, the portfolios choice, composed of their real non-financial units, is associated with the fact that, together with the criterion of profitability and risk, the criterion of economic growth, described by a set of portfolio units, is fulfilled. Consequently, the author argues that the portfolio theory gives a powerful impetus to the structural analysis development by combining the classical approach of J. Tobin and H. Markowitz (Tobin 1955;Markowitz 1959) and its modern interpretation by their followers, which gives a tangible prospect of such an extended application of portfolio theory, especially in the solution of structural choice problem.…”

Section: Discussionmentioning

confidence: 99%

“…In this case, making a structural choice defined by all combinations of the specified criteria is a promising area to study. This takes the problem beyond the standard portfolio equilibrium described by J. Tobin in 1955, when he considered the choice between the stock of physical capital and money as forms of wealth that build a portfolio with the equilibrium defined by equal rates of return for all assets (Tobin 1955). According to this approach, the owner of wealth makes a choice if the least variance of the return rate does not differ the rates of income.…”

Section: Research Methodology Portfolio Theory Developmentmentioning

confidence: 99%

“…Originated from the classical works by H. Markowitz, J. Tobin, and W. Sharpe (Markowitz 1952(Markowitz , 1959(Markowitz , 1991Markowitz and Dijk 2008;Tobin 1955;Sharpe 1970;Sharpe et al 1998), modern portfolio theory has gone a long way in its development, and has become an independent scientific domain, which gives both theoretical and very useful practical results.…”

Section: Introduction Portfolio Theory: Past and Presentmentioning

confidence: 99%

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Portfolio Theory in Solving the Problem Structural Choice

Sukharev

2020

JRFM

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The purpose of the article is to reveal the problem (and to determine the possibility of solving the structural choice problem) as one of the areas in modern portfolio theory development. The article also argues that portfolio analysis is a method of structural analysis for various economic units. The research methodology is defined by the portfolio theory, optimization models implemented by the numerical gradient projection method, the empirical static method of analysis and simulation cases when the models are implemented. The research supported by the above- mentioned methodology aimed to reach the goal results in substantiating the structural choice. This choice differs from the classical portfolio choice as it is necessary to find how the investments are allocated for the portfolio units, and the same should be done for the characteristics points, where it is a challenge to apply the efficient set theorem, because different structures for the allocation of the resources, investments give the same or nearly the same combination of the expected return and total portfolio risk. Economic sectors characterized by the profitability and business risk are seen to be the portfolio units in terms of the macroeconomic approach from the portfolio theory developed by Tobin. Total income maximization model and total portfolio risk minimization demonstrate both the structural choice problem, including at the characteristic points, and choice dependence on the expansion of the resource allocated to the portfolio, and on the number of portfolio units. The analysis and model simulations enhance the efficient set theorem with the criteria for structural choice—income and risk correlation on the effective distribution curve, among other factors. A portfolio with two real sectors of the Russian economy illustrates that profitability and risk ratio determines the resource allocation between them under the income maximization model, so one sector grabs a more substantial resource. Thus, being a tool to support the structural choice, portfolio analysis gives structural diagnostics for the resource distribution, investments allocation by portfolio units.

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Section: Discussionmentioning

confidence: 99%

Section: Research Methodology Portfolio Theory Developmentmentioning

confidence: 99%

Section: Introduction Portfolio Theory: Past and Presentmentioning

confidence: 99%

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Portfolio Theory in Solving the Problem Structural Choice

Sukharev

2020

JRFM

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“…The problem of maximizing terminal wealth from the perspective of individual investors under a loss aversion utility function has been studied by various authors (e.g., Berkelaar et al, 2004; Blake et al, 2013; Chen et al, 2017; Dong & Zheng, 2019). Jin and Zhou (2008), He and Zhou (2011), and van Bilsen and Laeven (2020) study the implications of loss aversion with a probability weighting function. In this study, we adopt the modelling framework of Blake et al (2013) as they tackled the investor's problem in a discrete‐time rebalancing setting that is similar to ours.…”

Section: The Investor's Problemsmentioning

confidence: 99%

Investing for retirement: Terminal wealth constraints or a desired wealth target?

Donnelly

Khemka

Lim

2022

Euro Fin Management

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We investigate how well different investment strategies can give pre‐retirees more certainty about their income in retirement, whilst allowing them to benefit from taking investment risk. Under an expected utility‐maximizing framework, we find that a loss aversion utility function gives a high degree of certainty about its desired wealth target and is robust to different market models. Imposing terminal wealth constraints does not improve the certainty of achieving the desired target enough to counterbalance the increased chance of obtaining a lower income. The power utility function is not robust to different market models and becomes too risk‐averse with wealth constraints.

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“…For concrete applications of this isomorphism, we refer to e.g. Munk (2008), Laeven (2020), andvan Bilsen et al (2020b).…”

Section: Brief Discussionmentioning

confidence: 99%

Duality methods for stochastic optimal control problems in finance

Kamma

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Dynamic consumption and portfolio choice under prospect theory

Cited by 13 publications

References 69 publications

Portfolio Theory in Solving the Problem Structural Choice

Portfolio Theory in Solving the Problem Structural Choice

Investing for retirement: Terminal wealth constraints or a desired wealth target?

Duality methods for stochastic optimal control problems in finance

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