Cumulative Prospect Theory Portfolio Selection
14 Pages Posted: 12 Jan 2021
Date Written: December 31, 2020
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
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