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This paper addresses the continuous-time portfolio selection problem undergeneralized disappointment aversion (GDA). The implicit definition of thecertainty equivalent within GDA preferences introduces time inconsistency tothis problem. We provide the sufficient and necessary conditions for a strategyto be an equilibrium by a fully nonlinear ordinary differential equation (ODE).Through an exploration of the existence and uniqueness of solution to the ODE,we establish the existence and uniqueness of the equilibrium. Our findingsindicate that under disappointment aversion (DA) preferences, non-participationin the stock market is the unique equilibrium. The numerical analysis revealsthat, under GDA preferences, the investment proportion in the stock marketconsistently remains smaller than the investment proportion under the classicalExpected Utility (EU) theory.

Dynamic portfolio selection under generalized disappointment aversion