Rationalizing investors' choices
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Publication:492872
DOI10.1016/J.JMATECO.2015.05.002zbMATH Open1320.91132arXiv1302.4679OpenAlexW3122384088MaRDI QIDQ492872FDOQ492872
Authors: Carole Bernard, Jit Seng Chen, Steven Vanduffel 
Publication date: 21 August 2015
Published in: Journal of Mathematical Economics (Search for Journal in Brave)
Abstract: Assuming that agents' preferences satisfy first-order stochastic dominance, we show how the Expected Utility paradigm can rationalize all optimal investment choices: the optimal investment strategy in any behavioral law-invariant (state-independent) setting corresponds to the optimum for an expected utility maximizer with an explicitly derived concave non-decreasing utility function. This result enables us to infer the utility and risk aversion of agents from their investment choice in a non-parametric way. We relate the property of decreasing absolute risk aversion (DARA) to distributional properties of the terminal wealth and of the financial market. Specifically, we show that DARA is equivalent to a demand for a terminal wealth that has more spread than the opposite of the log pricing kernel at the investment horizon.
Full work available at URL: https://arxiv.org/abs/1302.4679
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