In this paper we suggest a behavioral foundation for the reward-risk approach to portfolio selection based on prospect theory. We identify sufficient conditions for two-fund separation in reward-risk models in general, and for the behavioral reward-risk model in particular. It is shown that a...

We consider a simple CAPM with heterogenous expectations on assets' mean returns and homogenous expectations on the covariance of returns. In this model alpha-opportunities naturally arise in a financial market equilibrium. We show that that the hunt for alpha-opportunities is a zero-sum game...

The paper examines a dynamic model of a financial market with endogenous asset prices determined by short run equilibrium of supply and demand. Assets pay dividends that are partially consumed and partially reinvested. The traders use fixed-mix investment strategies (portfolio rules),...

We apply the recurrent reinforcement learning method of Moody et al. (1998) in the context of the strategic asset allocation computed for sample data from the United States, the United Kingdom, and Germany. It is found that the optimal asset allocation deviates substantially from the fixed-mix...

In this paper we analyze the long-run dynamics of the market selection process among simple trading strategies in an incomplete asset market with endogenous prices. We identify a unique surviving financial trading strategy. Investors following this strategy asymptotically gather total market...

The paper analyzes the process of market selection of investment strategies in an incomplete asset market. The pay offs of the assets depend on random factors described in terms of a discrete-time Markov process. Market participants make dynamic investment decisions based on their observations...

This paper shows that a stock market is evolutionary stable if and only if stocks are evaluated by expected relative dividends. Any other market can be invaded by portfolio rules that will gain market wealth and hence change the valuation. In the model the valuation of assets is given by the...

The prospect theory of Kahneman and Tversky (in Econometrica 47(2), 263-291, 1979) and the cumulative prospect theory of Tversky and Kahneman (in J. Risk Uncertainty 5, 297-323, 1992) are descriptive models for decision making that summarize several violations of the expected utility theory....

Under the assumption of normally distributed returns, we analyze whether the Cumulative Prospect Theory of Tversky and Kahneman (1992) is consistent with the Capital Asset Pricing Model. We find that in every financial market equilibrium, the Security Market Line Theorem holds. However, under...

Structured investment products, also known as equity- or index-linked notes, have become immensely popular among retail investors in the last ten years. In this paper, however, we show that for classical rational investors the utility gains from structured products are typically much smaller...