Correspondence between lifetime minimum wealth and utility of consumption
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We establish when the two problems of minimizing a function of lifetime minimum wealth and of maximizing utility of lifetime consumption result in the same optimal investment strategy on a given open interval O in wealth space. To answer this question, we equate the two investment strategies and show that if the individual consumes at the same rate in both problems—the consumption rate is a control in the problem of maximizing utility—then the investment strategies are equal only when the consumption function is linear in wealth on O, a rather surprising result. It then follows that the corresponding investment strategy is also linear in wealth and the implied utility function exhibits hyperbolic absolute risk aversion.
KeywordsOptimal control Probability of ruin Utility of consumption Investment/consumption decisions
Jel ClassificationG11 C61
Mathematics Subject Classification (2000)91B28 91B42
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