BEHAVIORAL PORTFOLIO SELECTION: ASYMPTOTICS AND STABILITY ALONG A SEQUENCE OF MODELS. (11th October 2013)

• Record Type: Journal Article
• Authors: Reichlin, Christian
• Is Part Of: Mathematical finance. Volume 26:Number 1(2016:Jan.)
• Page Start: 51
• Page End: 85
• Publication Date: 2013-10-11
• Subjects: portfolio selection -- nonconcave utility -- Choquet integral -- stability -- convergence -- behavioral finance; Business mathematics -- Periodicals; 332
• DOI: 10.1111/mafi.12053
• Languages: English
• ISSNs: 0960-1627

Abstract

Abstract: We consider a sequence of financial markets that converges weakly in a suitable sense and maximize a behavioral preference functional in each market. For expected concave utilities, it is well known that the maximal expected utilities and the corresponding final positions converge to the corresponding quantities in the limit model. We prove similar results for nonconcave utilities and distorted expectations as employed in behavioral finance, and we illustrate by a counterexample that these results require a stronger notion of convergence of the underlying models compared to the concave utility maximization. We use the results to analyze the stability of behavioral portfolio selection problems and to provide numerically tractable methods to solve such problems in complete continuous‐time models.