Loss Aversion and Ruinous Optimal Wagering in the Markowitz Model of Non-Expected Utility

Peel, David Alan and Law, David (2016) Loss Aversion and Ruinous Optimal Wagering in the Markowitz Model of Non-Expected Utility. Economics Bulletin, 36 (2). pp. 688-695. ISSN 1545-2921

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Abstract

The purpose in this note is to demonstrate that the non-expected utility model of Markowitz implies that agents can obtain maximum expected utility from wagering all of their wealth on actuarialy unfair high probability outcomes. In order to remove this property it is necessary to assume that loss aversion tends to infinity as stake size as a proportion of wealth approaches unity.