Rationalizing investors’ choices

Bernard, Carole; Chen, Jit Seng; Vanduffel, Steven

doi:10.1016/j.jmateco.2015.05.002

Cited by 40 publications

(13 citation statements)

References 31 publications

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“…On the one hand, we do not expect results to be necessarily different if essentially the behavioral theory is consistent with first-order stochastic dominance. In this case, Bernard, Chen, and Vanduffel (2015) have indeed proved that the optimal portfolio of a non-expected utility investor always coincides with the one of an expected utility investor with concave increasing utility. However, their setting is based on a one-period investment, which is still consistent with time-additive preferences in which the agent's attitude to risk are described similarly to attitude to intertemporal substitution.…”

Section: Discussionmentioning

confidence: 70%

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Optimal annuity demand for general expected utility agents

Bernard

Aquino

Levante³

2021

Insurance: Mathematics and Economics

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Section: Discussionmentioning

confidence: 70%

“…This approach is inspired by the optimal portfolio choice problem studied in Bernard, Chen, and Vanduffel (2015). In particular, they show how the expected utility paradigm can rationalize all optimal investment choices made by investors with preferences that are consistent with first-order stochastic dominance.…”

Section: A General Concave Utility Functionmentioning

confidence: 99%

Optimal annuity demand for general expected utility agents

Bernard

Aquino

Levante³

2021

Insurance: Mathematics and Economics

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“…One problem, however, with optimal portfolios derived in law-invariant frameworks 1 Bernard et al (2015a) show that this is equivalent to having preferences that satisfy first-order stochastic dominance (FSD). Interestingly, many economists consider a violation of this property as grounds for refuting a particular theory; see e.g., Birnbaum (1997), Birnbaum & Navarrette (1998), Levy (2008) for further discussions and empirical evidence of FSD violations.…”

Section: Introductionmentioning

confidence: 99%

Optimal portfolio choice with benchmarks

Bernard

Staelen

Vanduffel

2018

Journal of the Operational Research Society

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We construct an algorithm that makes it possible to numerically obtain an investor's optimal portfolio under general preferences. In particular, the objective function and risks constraints may be driven by benchmarks (reflecting state-dependent preferences). We apply the algorithm to various classic optimal portfolio problems for which explicit solutions are available and show that our numerical solutions are compatible with them. This observation allows us to conclude that the algorithm can be trusted as a viable way to deal with portfolio optimization problems for which explicit solutions are not in reach.

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“…The obtained strategy is optimal for the adopted utility function. The authors of [6] take the opposite approach: associate a utility function with a given payoff distribution. So, they can design a utility function to be optimised, for an educated anti-gambler who could specify their desired investment-outcome spread.…”

Section: Introductionmentioning

confidence: 99%

“…5 Notwithstanding the obtained solution's parameter-specificity, our analysis can be extended to other cases through the use of specialised software (see [12]). 6 Also [13], [14], [15] and [16] .…”

Section: Introductionmentioning

confidence: 99%

Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs

Krawczyk

2015

Risks

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For pension-savers, a low payoff is a financial disaster. Such investors will most likely prefer left-skewed payoff distributions over right-skewed payoff distributions. We explore how such distributions can be delivered. Cautious-relaxed utility measures are cautious in ensuring that payoffs don't fall much below a reference value, but relaxed about exceeding it. We find that the payoff distribution delivered by a cautious-relaxed utility measure has appealing features which payoff distributions delivered by traditional utility functions don't. In particular, cautious-relaxed distributions can have the mass concentrated on the left, hence be left-skewed. However, cautious-relaxed strategies prescribe frequent portfolio adjustments which may be expensive if transaction costs are charged. In contrast, more traditional strategies can be time-invariant. Thus we investigate the impact of transaction costs on the appeal of cautious-relaxed strategies. We find that relatively high transaction fees are required for the cautious-relaxed strategy to lose its appeal. This paper contributes to the literature which compares utility measures by the payoff distributions they produce and finds that a cautious-relaxed utility measure will deliver payoffs that many investors will prefer.

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Rationalizing investors’ choices

Cited by 40 publications

References 31 publications

Optimal annuity demand for general expected utility agents

Optimal annuity demand for general expected utility agents

Optimal portfolio choice with benchmarks

Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs

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