Portfolio choice with endogenous utility: a large deviations approach

Michael Stutzer

Chapter 43 in The Kelly Capital Growth Investment Criterion:Theory and Practice, 2011, pp 619-640 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This paper provides an alternative behavioral foundation for an investor's use of power utility in the objective function and its particular risk aversion parameter. The foundation is grounded in an investor's desire to minimize the objective probability that the growth rate of invested wealth will not exceed an investor-selected target growth rate. Large deviations theory is used to show that this is equivalent to using power utility, with an argument that depends on the investor's target, and a risk aversion parameter determined by maximization. As a result, an investor's risk aversion parameter is not independent of the investment opportunity set, contrary to the standard model assumption.

Keywords: Kelly Criterion; Dynamic Investment Analysis; Capital Growth Theory; Sports Betting; Hedge Fund Strategies; Speculative Investing; Fortune 's Formula (search for similar items in EconPapers)
Date: 2011
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Related works:
Journal Article: Portfolio choice with endogenous utility: a large deviations approach (2003)
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