The Optimal Payoff for a Yaari Investor

Abstract

Yaari's dual theory of choice is the natural counterpart of expected utility theory. While the optimal payoff choice for an expected utility maximizer is well studied in the literature, substantially less is known about the optimal payoff for a Yaari investor. In the first part of the paper, we study well-posedness of the optimal payoff problem for a Yaari investor and derive explicit solutions in a variety of relevant cases. In the second part of the paper, we extend the results to derive optimal payoffs for Yaari investors who wish to beat an external benchmark.

Keywords: Preferences, Optimization, Hoeffding-Fréchet bounds.