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CCF Seminar
Stephan Sturm
Title: Rationalizing Behavioral Portfolio Choice in Incomplete Markets

Abstract: Classical portfolio optimization theory postulates that investors' preferences are rational and the optimization criterion is expected utility, for some increasing and concave utility function. This contrasts with empirical findings of cognitive psychology. In particular, small extreme events are usually overweighted by investors, losses and gains far away from a given reference point have less impact and losses are usually feared more than gains. These findings lay the basis of the theory behavioral portfolio choice. In this talk we want to answer the question if (resp. under which conditions), a given behavioral portfolio choice in an incomplete semimartingale market can be rationalized in the rational expected utility framework. This generalizes results by Bernard, Chen and Vanduffel for complete markets. The key point in our analysis is the establishment of an incomplete version of Dybvig's cost efficiency principle. This is joint work with Carole Bernard (Grenoble Ecole de Management).

Date: Monday, October 12, 2015
Time: 4:30 pm
Location: Wean Hall 8220
Submitted by:  Kasper Larsen