Search results for "expected utility"
showing 9 items of 19 documents
Investing for the Long Run
2017
This paper studies long term investing by an investor that maximizes either expected utility from terminal wealth or from consumption. We introduce the concepts of a generalized stochastic discount factor (SDF) and of the minimum price to attain target payouts. The paper finds that the dynamics of the SDF needs to be captured and not the entire market dynamics, which simplifies significantly practical implementations of optimal portfolio strategies. We pay particular attention to the case where the SDF is equal to the inverse of the growth-optimal portfolio in the given market. Then, optimal wealth evolution is closely linked to the growth optimal portfolio. In particular, our concepts allo…
A Problem of Optimization in a Case of Foreign Investment
2000
The aim of the paper is to solve an optimization problem in an economic system with a central bank and a set of private agents. Each agent aims to maximize her expected utility, with rational expectations and being risk averse. The agents follow a profitability-risk criterium to face the portfolio diversification problem between foreign or domestic investment. An explicit formula for the optimal amount of foreign investment as a function of the expected exchange rate and an explicit formula for the exchange rate are obtained. These formulas show the hard influence of the expected exchange rate, the variance and the risk aversion on the agents’ decisions.
Climate Change, Uncertainty and Ethical Superstorms
2021
I argue that one of the most urgent tasks of geoethics is how to deal with climate change in a just and equitable way. At worst, our current path could lead to multi-metre sea-level rise, increases in storms and climate extremes, causing devastating social disruption and economic consequences. I present some alternatives on how to handle this alarming prospect, arguing that we cannot condense our decision-making on climate change into numerical calculations, but should instead make ethical judgements. The commonly used expected utility maximation can be considered a gamble on future generations’ expense for the benefit of the current ones. Thus, from a Rawlsian perspective, we will instead …
A Generalization of the Mean-Variance Analysis
2008
In this paper we consider a decision maker whose utility function has a kink at the reference point with different functions below and above this reference point. We also suppose that the decision maker generally distorts the objective probabilities. First we show that the expected utility function of this decision maker can be approximated by a function of mean and partial moments of distribution. This "mean-partial moments" utility generalizes not only the mean-variance utility of Tobin and Markowitz, but also the mean-semivariance utility of Markowitz. Then, in the spirit of Arrow and Pratt, we derive an expression for a risk premium when risk is small. Our analysis shows that a decision…
Discrete Time Portfolio Selection with Lévy Processes
2007
This paper analyzes discrete time portfolio selection models with Lévy processes. We first implement portfolio models under the hypotheses the vector of log-returns follow or a multivariate Variance Gamma model or a Multivariate Normal Inverse Gaussian model or a Brownian Motion. In particular, we propose an ex-ante and an ex-post empirical comparisons by the point of view of different investors. Thus, we compare portfolio strategies considering different term structure scenarios and different distributional assumptions when unlimited short sales are allowed.
A Generalisation of the Mean-Variance Analysis
2009
In this paper we consider a decision maker whose utility function has a kink at the reference point with different functions below and above this reference point. We also suppose that the decision maker generally distorts the objective probabilities. First we show that the expected utility function of this decision maker can be approximated by a function of mean and partial moments of distribution. This ‘mean-partial moments’ utility generalises not only mean-variance utility of Tobin and Markowitz, but also mean-semivariance utility of Markowitz. Then, in the spirit of Arrow and Pratt, we derive an expression for a risk premium when risk is small. Our analysis shows that a decision maker i…
A Unified Approach to Portfolio Optimization with Linear Transaction Costs
2004
In this paper we study the continuous time optimal portfolio selection problem for an investor with a finite horizon who maximizes expected utility of terminal wealth and faces transaction costs in the capital market. It is well known that, depending on a particular structure of transaction costs, such a problem is formulated and solved within either stochastic singular control or stochastic impulse control framework. In this paper we propose a unified framework, which generalizes the contemporary approaches and is capable to deal with any problem where transaction costs are a linear/piecewise-linear function of the volume of trade. We also discuss some methods for solving numerically the p…
A model of adaptive decision-making from representation of information environment by quantum fields
2017
We present the mathematical model of decision making (DM) of agents acting in a complex and uncertain environment (combining huge variety of economical, financial, behavioral, and geo-political factors). To describe interaction of agents with it, we apply the formalism of quantum field theory (QTF). Quantum fields are of the purely informational nature. The QFT-model can be treated as a far relative of the expected utility theory, where the role of utility is played by adaptivity to an environment (bath). However, this sort of utility-adaptivity cannot be represented simply as a numerical function. The operator representation in Hilbert space is used and adaptivity is described as in quantu…
Negative results in the theory of games with lexicographic utilities
2003
When players may have lexicographic utilities, there are: (i) extensive games having a non-empty set of equilibria but empty sets of sequentially rational, sequential and perfect equilibria (ii) normal form games having a non-empty set of equilibria but an empty set of proper equilibria and no stable set of equilibria and (iii) two extensive games having the same normal form representation and disjoint sets of sequential equilibria.