IDEAS home Printed from
   My bibliography  Save this article

Portfolio Selections with Innate Learning Ability


  • Jin-Ray Lu

    (Department of Finance, National Dong Hwa University, Taiwan)

  • Chih-Ming Chan

    (Department of Finance, National Chung Cheng University, Taiwan)

  • Wen-Shen Li

    (Department of Finance, National Dong Hwa University, Taiwan)


This study explores how innate learning ability changes portfolio selection decision-making in a continuous-time framework. We re-solve Samuelson-Merton¡¦s portfolio choice problem framed in a fixed investment opportunity set for an individual with a learning ability. In contrast to traditional theoretical results, we suggest that risk-averse investors with a risk-cognitive ability hold a lower fraction of risky stocks to hedge against the jump risk and volatility risk since the investors are cognizant of the market risks. In addition, an individual whose learning process correlates strongly with stock movements would be likely to invest more in stocks.

Suggested Citation

  • Jin-Ray Lu & Chih-Ming Chan & Wen-Shen Li, 2011. "Portfolio Selections with Innate Learning Ability," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 10(3), pages 201-217, December.
  • Handle: RePEc:ijb:journl:v:10:y:2011:i:3:p:201-217

    Download full text from publisher

    File URL:
    Download Restriction: no

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Michael W. Brandt & Amit Goyal & Pedro Santa-Clara & Jonathan R. Stroud, 2005. "A Simulation Approach to Dynamic Portfolio Choice with an Application to Learning About Return Predictability," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 831-873.
    2. Jun Liu & Francis A. Longstaff & Jun Pan, 2003. "Dynamic Asset Allocation with Event Risk," Journal of Finance, American Finance Association, vol. 58(1), pages 231-259, February.
    3. repec:oup:jfinec:v:10:y:2012:i:1:p:164-197 is not listed on IDEAS
    4. Borgers, Tilman, 1996. "On the Relevance of Learning and Evolution to Economic Theory," Economic Journal, Royal Economic Society, vol. 106(438), pages 1374-1385, September.
    5. Guidolin, Massimo & Timmermann, Allan, 2007. "Asset allocation under multivariate regime switching," Journal of Economic Dynamics and Control, Elsevier, vol. 31(11), pages 3503-3544, November.
    6. Borgers, Tilman & Sarin, Rajiv, 1997. "Learning Through Reinforcement and Replicator Dynamics," Journal of Economic Theory, Elsevier, vol. 77(1), pages 1-14, November.
    7. Yihong Xia, 2001. "Learning about Predictability: The Effects of Parameter Uncertainty on Dynamic Asset Allocation," Journal of Finance, American Finance Association, vol. 56(1), pages 205-246, February.
    8. Jakša Cvitanić & Ali Lazrak & Lionel Martellini & Fernando Zapatero, 2006. "Dynamic Portfolio Choice with Parameter Uncertainty and the Economic Value of Analysts' Recommendations," Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1113-1156.
    9. Atanasios Mitropoulos, 2004. "Economic Learning, Experiments and the Limits to Information," Books, Edward Elgar Publishing, number 3408.
    10. 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.
    11. M. J. Brennan, 1998. "The Role of Learning in Dynamic Portfolio Decisions," Review of Finance, European Finance Association, vol. 1(3), pages 295-306.
    12. Michael J. Brennan & Yihong Xia, 2002. "Dynamic Asset Allocation under Inflation," Journal of Finance, American Finance Association, vol. 57(3), pages 1201-1238, June.
    13. Chellathurai, Thamayanthi & Draviam, Thangaraj, 2007. "Dynamic portfolio selection with fixed and/or proportional transaction costs using non-singular stochastic optimal control theory," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2168-2195, July.
    14. Bertille Antoine, 2010. "Portfolio Selection with Estimation Risk: A Test-Based Approach," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 10(1), pages 164-197, 2012 10 1.
    15. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters,in: THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472 World Scientific Publishing Co. Pte. Ltd..
    16. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
    17. Thorsten Hens & Peter Wöhrmann, 2007. "Strategic asset allocation and market timing: a reinforcement learning approach," Computational Economics, Springer;Society for Computational Economics, vol. 29(3), pages 369-381, May.
    18. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, vol. 8(4), pages 323-361, December.
    19. Detemple, Jerome B, 1986. " Asset Pricing in a Production Economy with Incomplete Information," Journal of Finance, American Finance Association, vol. 41(2), pages 383-391, June.
    Full references (including those not matched with items on IDEAS)

    More about this item


    learning; asset allocation; cognition;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ijb:journl:v:10:y:2011:i:3:p:201-217. 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: (Yi-Ju Su). General contact details of provider: .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.