Consumption and portfolio rules for time-inconsistent investors
This paper extends the classical consumption and portfolio rules model in continuous time [Merton, R.C., 1969. Lifetime portfolio selection under uncertainty: The continuous time case. Review of Economics and Statistics 51, 247-257, Merton, R.C., 1971. Optimum consumption and portfolio rules in a continuous time model. Journal of Economic Theory 3, 373-413] to the framework of decision-makers with time-inconsistent preferences. The model is solved for different utility functions for both, naive and sophisticated agents, and the results are compared. In order to solve the problem for sophisticated agents, we derive a modified HJB (Hamilton-Jacobi-Bellman) equation. It is illustrated how for CRRA functions within the family of HARA functions (logarithmic and power utilities) the optimal portfolio rule does not depend on the discount rate, but this is not the case for a general utility function, such as the exponential (CARA) utility function.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Steven R. Grenadier & Neng Wang, 2006.
"Investment Under Uncertainty and Time-Inconsistent Preferences,"
NBER Working Papers
12042, National Bureau of Economic Research, Inc.
- Grenadier, Steven R. & Wang, Neng, 2007. "Investment under uncertainty and time-inconsistent preferences," Journal of Financial Economics, Elsevier, vol. 84(1), pages 2-39, April.
- Grenadier, Steven R. & Wang, Neng, 2005. "Investment under Uncertainty and Time-Inconsistent Preferences," Research Papers 1899, Stanford University, Graduate School of Business.
- Karp, Larry, 2004.
"Non-constant discounting in continuous time,"
CUDARE Working Paper Series
0969, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
- Karp, Larry, 2004. "Non-Constant Discounting in Continuous Time," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7pr05084, Department of Agricultural & Resource Economics, UC Berkeley.
- Karp, Larry, 2005. "Non-Constant Discounting in Continuous Time," Institute for Research on Labor and Employment, Working Paper Series qt0nn1t22z, Institute of Industrial Relations, UC Berkeley.
- George Loewenstein & Drazen Prelec, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 573-597.
- Merton, Robert C., 1971.
"Optimum consumption and portfolio rules in a continuous-time model,"
Journal of Economic Theory,
Elsevier, vol. 3(4), pages 373-413, December.
- R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
- Tomak, Kerem & Keskin, Tayfun, 2008. "Exploring the trade-off between immediate gratification and delayed network externalities in the consumption of information goods," European Journal of Operational Research, Elsevier, vol. 187(3), pages 887-902, June.
- Christopher Harris & David Laibson, 2001.
Levine's Working Paper Archive
625018000000000267, David K. Levine.
- Laibson, David I. & Harris, Christopher, 2012. "Instantaneous Gratification," Scholarly Articles 9918802, Harvard University Department of Economics.
- Christopher Harris & David Laibson, 2006. "Instantaneous Gratification," Levine's Bibliography 321307000000000635, UCLA Department of Economics.
- Christopher Harris & David Laibson, 2001. "Instantaneous Gratification," NajEcon Working Paper Reviews 625018000000000267, www.najecon.org.
- Marín-Solano, Jesús & Navas, Jorge, 2009.
"Non-constant discounting in finite horizon: The free terminal time case,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 33(3), pages 666-675, March.
- Jesus Marin Solano & Jorge Navas Rodenes, 2007. "Non-constant discounting in finite horizon: The free terminal time case," Working Papers in Economics 183, Universitat de Barcelona. Espai de Recerca en Economia.
- Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
- Josa-Fombellida, Ricardo & Rincon-Zapatero, Juan Pablo, 2008. "Mean-variance portfolio and contribution selection in stochastic pension funding," European Journal of Operational Research, Elsevier, vol. 187(1), pages 120-137, May.
- Chang,Fwu-Ranq, 2004.
"Stochastic Optimization in Continuous Time,"
Cambridge University Press, number 9780521834063, june. pag.
- Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
- E. S. Phelps & R. A. Pollak, 1968. "On Second-Best National Saving and Game-Equilibrium Growth," Review of Economic Studies, Oxford University Press, vol. 35(2), pages 185-199.
- Robert J. Barro, 1999. "Ramsey Meets Laibson in the Neoclassical Growth Model," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1125-1152.
- Laibson, David I., 1997.
"Golden Eggs and Hyperbolic Discounting,"
4481499, Harvard University Department of Economics.
- R. A. Pollak, 1968. "Consistent Planning," Review of Economic Studies, Oxford University Press, vol. 35(2), pages 201-208.
When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:201:y:2010:i:3:p:860-872. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.