It is well known that backward stochastic differential equations (BSDEs) stem from the study on the Pontryagin type maximum principle for optional stochastic control. A solution of a BSDE hits a given terminal value (which is a random variable) by virtue of an additional martingale term and an...

The existence of an adapted solution to a backward stochastic differential equation which is not adapted to the filtration of the underlying Brownian motion is proved. This result is applied to the pricing of contingent claims. It allows to compare the prices of agents who have different...

We consider the dynamic casino gambling model initially proposed by Barberis [Manage. Sci., 2012, 58, 35-51] and study the optimal stopping strategy of a pre-committing gambler with cumulative prospect theory (CPT) preferences. We illustrate how the strategies computed in Barberis [2012] can be...

We propose a rank-dependent portfolio choice model in continuous time that captures the role in decision making of three emotions: hope, fear and aspirations. Hope and fear are modeled through an inverse-S shaped probability weighting function and aspirations through a probabilistic constraint....

Finding the worst-case value of a preference over a set of plausible models is a well-established approach to address the issue of model uncertainty or ambiguity. In this paper, we study the worst-case evaluation of Yaari's dual utility functionals of an aggregate risk under dependence...

This paper quantifies the notion of greed, and explores its connection with leverage and potential losses, in the context of a continuous-time behavioral portfolio choice model under (cumulative) prospect theory. We argue that the reference point can serve as the critical parameter in defining...

We formulate and carry out an analytical treatment of a single-period portfolio choice model featuring a reference point in wealth, S-shaped utility (value) functions with loss aversion, and probability weighting under Kahneman and Tversky's cumulative prospect theory (CPT). We introduce a new...

We provide conditions on a one-period-two-date pure exchange economy with rank-dependent utility agents under which Arrow-Debreu equilibria exist. When such an equilibrium exists, we derive the state-price density explicitly, which is a weighted marginal rate of substitution between the initial...

We study the evolution of the Arrow-Pratt measure of risk-tolerance in the framework of discrete-time predictable forward utility (or performance) processes. An agent starts with an initial utility function, which is then sequentially updated forward in time under the guidance of the martingale...

The security market line is often flat or downward-sloping. We hypothesize that probability weighting plays a role and that one ought to differentiate between periods in which agents overweight extreme events and those in which they underweight them. Overweighting inflates the probability of...