Math aversion.

Optimal Trading with Stochastic Liquidity and Volatility

We consider the problem of mean-variance optimal agency execution strategies, when the market liquidity and volatility vary randomly in time. Under specific assumptions for the stochastic processes satisfied by these parameters, we construct a Hamilton–Jacobi–Bellman equation for the optimal cost and strategy. We solve this equation numerically and illustrate optimal strategies for varying risk...

Convergence of Utility Indifference Prices to the Superreplication Price

A discrete-time financial market model is considered with a sequence of investors whose preferences are described by concave strictly increasing functions defined on the positive axis. Under suitable conditions we show that, whenever their absolute risk-aversion tends to infinity, the respective utility indifference prices of a given bounded contingent claim converge to the superreplication price.

Behavioral Biases and Firm Behavior: Evidence from Kenyan Retail Shops

Many subjects in lab experiments show considerable risk aversion in small-stakes gambles. This is counter to the predictions of expected utility theory for any reasonable degree of risk aversion (Rabin 2000) but is consistent with loss aversion in prospect theory. Benjamin, Brown, and Shapiro (forthcoming) show that math skills reduce small-stakes risk aversion, consistent with broader evidence...

Local Utility and Multivariate Risk Aversion

We revisit Machina’s local utility as a tool to analyze attitudes to multivariate risks. Using martingale embedding techniques, we show that for nonexpected utility maximizers choosing between multivariate prospects, aversion to multivariate mean preserving increases in risk is equivalent to the concavity of the local utility functions, thereby generalizing Machina’s result in [18]. To analyze ...

Generalised Risk-Sensitive Control with Full and Partial State Observation

Optimal Diversification in the Presence of Parameter Uncertainty for a Risk Averse Investor

We consider an investor who faces parameter uncertainty in a continuous-time financial market. We model the investor’s preference by a power utility function leading to constant relative risk aversion. We show that the loss in expected utility is large when using a simple plug-in strategy for unknown parameters. We also provide theoretical results that show the trade-off between holding a well-...