In this paper we propose some portfolio selection models based on Cumulative Prospect Theory. In particular, we consider two different probability distortion functions, respectively advanced by Tversky and Kahneman and by Prelec. The resulting mathematical programming problem turn out to be highly non-linear and non-differentiable. Then, we apply the portfolios selected under the behavioral approach to the European equity market as represented by the STOXX Europe 600 Index and compare their performances.
Some probability distortion functions in behavioral portfolio selection
Diana Barro
;Marco Corazza
;Martina Nardon
2021-01-01
Abstract
In this paper we propose some portfolio selection models based on Cumulative Prospect Theory. In particular, we consider two different probability distortion functions, respectively advanced by Tversky and Kahneman and by Prelec. The resulting mathematical programming problem turn out to be highly non-linear and non-differentiable. Then, we apply the portfolios selected under the behavioral approach to the European equity market as represented by the STOXX Europe 600 Index and compare their performances.
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