An Efficient Adaptive Real Coded Genetic Algorithm to Solve the Portfolio Choice Problem Under Cumulative Prospect Theory

Chao Gong (), Chunhui Xu and Ji Wang
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Chao Gong: Chiba Institute of Technology
Chunhui Xu: Chiba Institute of Technology
Ji Wang: Chiba Institute of Technology

Computational Economics, 2018, vol. 52, issue 1, No 11, 227-252

Abstract: Abstract Cumulative prospect theory (CPT) has become one of the most popular approaches for evaluating the behavior of decision makers under conditions of uncertainty. Substantial experimental evidence suggests that human behavior may significantly deviate from the traditional expected utility maximization framework when faced with uncertainty. The problem of portfolio selection should be revised when the investor’s preference is for CPT instead of expected utility theory. However, because of the complexity of the CPT function, little research has investigated the portfolio choice problem based on CPT. In this paper, we present an operational model for portfolio selection under CPT, and propose a real-coded genetic algorithm (RCGA) to solve the problem of portfolio choice. To overcome the limitations of RCGA and improve its performance, we introduce an adaptive method and propose a new selection operator. Computational results show that the proposed method is a rapid, effective, and stable genetic algorithm.

Keywords: Portfolio choice; Cumulative prospect theory; Adaptive real coded genetic algorithms; Multivariate normal distribution (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10614-017-9669-5

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