Cumulative Prospect Theory Portfolio Selection

We introduce elements of Cumulative Prospect Theory into the portfolio selection problem and then compare stock portfolios selected under the behavioral approach with those selected according to classical approaches, such as Mean Variance and Mean Absolute Deviation ones. The mathematical programming problem associated to the behavioral portfolio selection is highly non-linear and non-differentiable; for these reasons it is solved using a Particle Swarm Optimization approach. An application to the STOXX Europe 600 equity market is performed.

Keywords: Cumulative Prospect Theory, Portfolio Selection, Particle Swarm Optimization

JEL Classification: G40, G11, C61

Suggested Citation: Suggested Citation

Barro, Diana and Corazza, Marco and Nardon, Martina, Cumulative Prospect Theory Portfolio Selection (December 31, 2020). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 26/WP/2020, Available at SSRN: https://ssrn.com/abstract=3764530 or http://dx.doi.org/10.2139/ssrn.3764530