Stochastic Maximum Principle Under Probability Distortion
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Within the framework of the cumulative prospective theory of Kahneman and Tversky, this paper considers a continuous-time behavioral portfolio selection problem whose model includes both running and terminal terms in the objective functional. Despite the existence of S-shaped utility functions and probability distortions, a necessary condition for the optimality is derived. The results are applied to a few examples.
KeywordsCumulative prospective theory S-shaped utility function Probability distortion Stochastic maximum principle Behavioral portfolio optimization
AMS subject classificationsPrimary 93E20 Secondary 91G80
We would like to than an anonymous reviewer for his/her constructive comments and suggestions which improve this paper substantially.