Correspondence between lifetime minimum wealth and utility of consumption (Q2463711)

The authors consider two connected problems of consumption/investment: the problem of minimizing of function of lifetime minimum wealth and the classical Merton problem that aims at maximizing the expected discounted utility derived from investor's rate of lifetime consumption. They completely characterize the utility functions (and corresponding consumption functions) for which an investor behaves in the same way under these two problems. For this purpose, they 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 a given open interval in wealth space. In this case the implied utility function exhibits hyperbolic absolute risk aversion.