Neilson's Weak vs. Strong Loss Aversion: A Characterization and a Generalized CPT-Utility Function

Battle Count: 56

The paper is moderately relevant to quantitative trading. CPT-based utility functions are increasingly used in behavioral finance to model investor risk preferences, loss aversion, and reference-dependent decision-making. The generalized utility function could inform portfolio optimization under behavioral preferences, risk management frameworks that account for asymmetric loss/gain sensitivity, and algorithmic trading strategies that model human behavioral biases. However, the paper is primarily theoretical and does not directly propose trading strategies or empirical market models.

The proposed generalized CPT-utility function (Equation 42) involves multiple parameters (λ1, λ2, λ3, α, β, γ1, γ2) with specific sign and monotonicity constraints. Implementing the full framework requires careful parameter calibration, verification of S-shape conditions, and handling of the composite functions g1 and g2. The theoretical proofs are complex but the final parametric form is tractable for numerical implementation. Sensitivity analysis across the parameter space adds computational overhead.

The paper is purely theoretical with complete mathematical proofs provided in Appendix A. All theorems, definitions, and parametric specifications are explicitly stated with full derivations. The generalized utility function (Equations 28, 39, 42) is fully specified with parameter constraints. However, no numerical experiments or code are provided for validation.