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Many-player games of optimal consumption and investment under relative performance criteria

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  • Daniel Lacker
  • Agathe Soret

Abstract

We study a portfolio optimization problem for competitive agents with CRRA utilities and a common finite time horizon. The utility of an agent depends not only on her absolute wealth and consumption but also on her relative wealth and consumption when compared to the averages among the other agents. We derive a closed form solution for the $n$-player game and the corresponding mean field game. This solution is unique in the class of equilibria with constant investment and continuous time-dependent consumption, both independent of the wealth of the agent. Compared to the classical Merton problem with one agent, the competitive model exhibits a wide range of highly nonlinear and non-monotone dependence on the agents' risk tolerance and competitiveness parameters. Counter-intuitively, competitive agents with high risk tolerance may behave like non-competitive agents with low risk tolerance.

Suggested Citation

  • Daniel Lacker & Agathe Soret, 2019. "Many-player games of optimal consumption and investment under relative performance criteria," Papers 1905.11782, arXiv.org.
    • Handle: RePEc:arx:papers:1905.11782
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    File URL: http://arxiv.org/pdf/1905.11782
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    Cited by:

    1. Robert Balkin & Hector D. Ceniceros & Ruimeng Hu, 2023. "Stochastic Delay Differential Games: Financial Modeling and Machine Learning Algorithms," Papers 2307.06450, arXiv.org.

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