Optimal Financial Investments for Non-Concave Utility Functions

Abstract

We prove a formula for the computation of optimal financial investments in an expected utility framework with arbitrary (not necessarily concave) utility functions. This extends classical results on optimal financial investments for strictly concave utility functions and is of importance particularly for applications of prospect theory where the utility function has a convex-concave shape.

Keywords: optimal investments, non-concave utility function, prospect theory

JEL Classification: G11, D03