Title
All investors are risk averse expected utility maximizers
Paper
Bernard, Carole, Chen, Jit Seng and Vanduffel, Steven (2012). All investors are risk averse expected utility maximizers. Working Paper
Abstract
Assuming that preferences of agents satisfy first-order stochastic dominance, we show that the Expected Utility Paradigm can explain all rational investment choices. In particular the optimal investment strategy in any behavioral law-invariant setting corresponds to the optimum for some expected utility maximizer and we are able to derive the utility function explicitly. Thus our results also allow us to infer agents' utility and risk aversion from their investment choice in a non-parametric way. Finally, we establish close connections between distributional properties of terminal wealth and agents' preferences.