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OPTIMAL DEMAND FOR CONTINGENT CLAIMS WHEN AGENTS HAVE LAW INVARIANT UTILITIES
Author(s) -
Carlier G.,
Dana R.A.
Publication year - 2011
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/j.1467-9965.2010.00431.x
Subject(s) - expected utility hypothesis , invariant (physics) , mathematical economics , economics , class (philosophy) , cumulative prospect theory , computation , rank (graph theory) , utility theory , econometrics , microeconomics , mathematics , computer science , artificial intelligence , algorithm , combinatorics , mathematical physics
We consider a class of law invariant utilities, which contains the rank‐dependent expected utility (RDU) and the cumulative prospect theory (CPT). We show that the computation of demand for a contingent claim when utilities are within that class, although not as simple as in the expected utility (EU) case, is still tractable. Specific attention is given to the RDU and to the CPT cases. Numerous examples are fully solved.