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Optimal portfolio choice when utility depends on health

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  • Ryan D. Edwards

Abstract

This paper examines optimal portfolio choice when health can change the shape of the utility function. If adverse health shocks threaten to increase the marginal utility of consumption, that is, if they are Edgeworth–Pareto substitutes, risky health prompts individuals to lower their risky portfolio shares. Health naturally becomes more uncertain with age, so this theory might help to explain why aging investors gradually decrease their risk exposure even when asset returns display no mean reversion and relative risk aversion is constant.

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  • Ryan D. Edwards, 2010. "Optimal portfolio choice when utility depends on health," International Journal of Economic Theory, The International Society for Economic Theory, vol. 6(2), pages 205-225, June.
    • Handle: RePEc:bla:ijethy:v:6:y:2010:i:2:p:205-225
    DOI: 10.1111/j.1742-7363.2010.00131.x
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