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Optimal financial investments for non-concave utility functions

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  • Rieger, Marc Oliver

Abstract

We prove a formula for the computation of optimal financial investments in an expected utility framework with arbitrary (not necessarily concave) utility functions. This extends classical results on optimal financial investments for strictly concave utility functions and is of importance particularly for applications of prospect theory where the utility function has a convex–concave shape.

Suggested Citation

  • Rieger, Marc Oliver, 2012. "Optimal financial investments for non-concave utility functions," Economics Letters, Elsevier, vol. 114(3), pages 239-240.
  • Handle: RePEc:eee:ecolet:v:114:y:2012:i:3:p:239-240 DOI: 10.1016/j.econlet.2011.10.029
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    References listed on IDEAS

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    1. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    2. Leland, Hayne E, 1980. " Who Should Buy Portfolio Insurance?," Journal of Finance, American Finance Association, vol. 35(2), pages 581-594, May.
    3. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    4. Stanley R. Pliska, 1984. "A Stochastic Calculus Model of Continuous Trading: Optimal Portfolios," Discussion Papers 608, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    5. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    6. Kenneth J. Arrow, 1974. "The Use of Unbounded Utility Functions in Expected-Utility Maximization: Response," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 136-138.
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    Citations

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    Cited by:

    1. Thorsten Hens & Marc Oliver Rieger, 2014. "Can utility optimization explain the demand for structured investment products?," Quantitative Finance, Taylor & Francis Journals, vol. 14(4), pages 673-681, April.

    More about this item

    Keywords

    Optimal investments; Non-concave utility function; Prospect theory;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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