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A generalization of Dybvig’s result on portfolio selection with intolerance for decline in consumption


  • Koo, Byung Lim
  • Koo, Hyeng Keun
  • Koo, Jung Lim
  • Hyun, ChongSeok


In this note we show the following result of Dybvig (1995) is valid for a general von Neumann–Morgenstern utility function: for an agent who does not tolerate a decline in consumption, the optimal investment out of discretionary wealth (in excess of the perpetuity value of current consumption) in the risky asset does not depend on the risk aversion coefficient of her felicity function locally when she does not adjust her consumption. The homotheticity assumption is not required. An implication of our result is that if an economic agent exhibits non-time-separable preference due to intertemporal linkage of consumption, her risk-taking over a short time period can be independent of her felicity function.

Suggested Citation

  • Koo, Byung Lim & Koo, Hyeng Keun & Koo, Jung Lim & Hyun, ChongSeok, 2012. "A generalization of Dybvig’s result on portfolio selection with intolerance for decline in consumption," Economics Letters, Elsevier, vol. 117(3), pages 646-649.
  • Handle: RePEc:eee:ecolet:v:117:y:2012:i:3:p:646-649
    DOI: 10.1016/j.econlet.2012.08.027

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    References listed on IDEAS

    1. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
    2. Riedel, Frank, 2009. "Optimal consumption choice with intolerance for declining standard of living," Journal of Mathematical Economics, Elsevier, vol. 45(7-8), pages 449-464, July.
    3. Philip H. Dybvig, 1995. "Dusenberry's Ratcheting of Consumption: Optimal Dynamic Consumption and Investment Given Intolerance for any Decline in Standard of Living," Review of Economic Studies, Oxford University Press, vol. 62(2), pages 287-313.
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    More about this item


    Portfolio selection; Intolerance for decline in consumption; Risk taking; Felicity function;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions


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