Continuous-Time Portfolio Optimisation for a Behavioural Investor with Bounded Utility on Gains

Miklós Rásonyi (Alfréd Rényi Institute of Mathematics and University of Edinburgh)
Andrea Sofia Meireles Rodrigues (University of Edinburgh)


This paper examines an optimal investment problem in a continuous-time (essentially) complete financial market with a finite horizon. We deal with an investor who behaves consistently with principles of Cumulative Prospect Theory, and whose utility function on gains is bounded above. The well-posedness of the optimisation problemis trivial, and a necessary condition for the existence of an optimal trading strategyis derived. This condition requires that the investor’s probability distortion function on losses does not tend to 0 near 0 faster than a given rate, which is determined by the utility function. Under additional assumptions, we show that this condition is indeed the borderline for attainability, in the sense that for slower convergence of the distortion function there does exist an optimal portfolio.

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Pages: 1-13

Publication Date: June 23, 2014

DOI: 10.1214/ECP.v19-2990


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