 Consumption and portfolio rules for time-inconsistent investorsJesus Marin-Solano and Jorge Navas European Journal of Operational Research, 2010, vol. 201, issue 3, 860-872 Abstract: 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. Keywords: Finance; Consumption; and; portfolio; rules; Non-constant; discounting; Time; inconsistency; Naive; and; sophisticated; agents; Dynamic; programming (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:201:y:2010:i:3:p:860-872 Access Statistics for this article European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati More articles in European Journal of Operational Research from Elsevier |
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