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On a dynamic adaptation of the Distribution Builder approach to investment decisions

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  • Phillip Monin

Abstract

Sharpe et al. proposed the idea of having an expected utility maximizer choose a probability distribution for future wealth as an input to her investment problem instead of a utility function. They developed a computer program, called The Distribution Builder, as one way to elicit such a distribution. In a single-period model, they then showed how this desired distribution for terminal wealth can be used to infer the investor's risk preferences. We adapt their idea, namely that a risk-averse investor can choose a desired distribution for future wealth as an alternative input attribute for investment decisions, to continuous time. In a variety of scenarios, we show how the investor's desired distribution combines with her initial wealth and market-related input to determine the feasibility of her distribution, her implied risk preferences, and her optimal policies throughout her investment horizon. We then provide several examples.

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  • Phillip Monin, 2013. "On a dynamic adaptation of the Distribution Builder approach to investment decisions," Papers 1301.0907, arXiv.org.
    • Handle: RePEc:arx:papers:1301.0907
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    References listed on IDEAS

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    1. Cox, John C. & Leland, Hayne E., 2000. "On dynamic investment strategies," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1859-1880, October.
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    3. M. Musiela & T. Zariphopoulou, 2009. "Portfolio choice under dynamic investment performance criteria," Quantitative Finance, Taylor & Francis Journals, vol. 9(2), pages 161-170.
    4. Carole Bernard & Phelim P. Boyle & Steven Vanduffel, 2014. "Explicit Representation of Cost-Efficient Strategies," Finance, Presses universitaires de Grenoble, vol. 35(2), pages 5-55.
    5. Daniel G. Goldstein & Eric J. Johnson & William F. Sharpe, 2008. "Choosing Outcomes versus Choosing Products: Consumer-Focused Retirement Investment Advice," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 35(3), pages 440-456, August.
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