24 Pages Posted: 28 May 2016
Date Written: December 16, 2006
We establish when the two problems of minimizing a function of lifetime minimum wealth and of maximizing utility of lifetime consumption result in the same optimal investment strategy on a given open interval O in wealth space. To answer this question, we equate the two investment strategies and show that if the individual consumes at the same rate in both problems -- the consumption rate is a control in the problem of maximizing utility -- then the investment strategies are equal only when the consumption function is linear in wealth on O, a rather surprising result. It, then, follows that the corresponding investment strategy is also linear in wealth and the implied utility function exhibits hyperbolic absolute risk aversion.
Keywords: Optimal control, Probability of ruin, Utility of consumption, Investment/consumption decisions
JEL Classification: G11, C61
Suggested Citation: Suggested Citation
Bayraktar, Erhan and Young, V.R., Correspondence between Lifetime Minimum Wealth and Utility of Consumption (December 16, 2006). Finance Stochastics, Vol. 11, 2007. Available at SSRN: https://ssrn.com/abstract=2785660