Optimal Investment with Uncertain Risk Aversion

Abstract

We solve the problem of an investor who maximizes utility but is uncertain about preferences. We propose a problem formulation based on expected certainty equivalents. We tackle the time-consistency issues arising from that formulation by applying the equilibrium theory approach. To this end, we provide the proper de nitions and proof a rigorous veri fication theorem. We complete the calculations for the cases of power and exponential utility. For power utility, we illustrate in a numerical example, that the optimal stock proportion is independent of wealth, but decreasing in time. For exponential utility, the usual constant absolute risk aversion is replaced by its expectation.