The optimal portfolio selection model under \(g\)-expectation (Q1724103)

Summary: This paper solves the optimal portfolio selection model under the framework of the prospect theory proposed by \textit{D. Kahneman} and \textit{A. Tversky} [Econometrica 47, 263--291 (1979; Zbl 0411.90012)] with decision rule replaced by the \(g\)-expectation introduced by \textit{S. Peng} [``Modelling derivatives pricing mechanisms with their generating functions'', Preprint, \url{arXiv:math/0605599}]. This model was established in the general continuous time setting and firstly adopted the \(g\)-expectation to replace Choquet expectation adopted in the work of \textit{H. Jin} and \textit{X. Y. Zhou} [Math. Finance 18, No. 3, 385--426 (2008; Zbl 1141.91454)]. Using different S-shaped utility functions and \(g\)-functions to represent the investors' different uncertainty attitudes towards losses and gains makes the model not only more realistic but also more difficult to deal with. Although the models are mathematically complicated and sophisticated, the optimal solution turns out to be surprisingly simple, the payoff of a portfolio of two binary claims. Also I give the economic meaning of my model and the comparison with that one in the work of Jin and Zhou [loc. cit.].