Multi-objective portfolio selection considering expected and total utility

Abstract

To address the challenge of risk minimization associated with investors’ irrational investment decisions in the face of wealth fluctuations, this article integrates prospect theory and disappointment theory into the framework of multi-objective portfolio selection. By concurrently incorporating prospect theory and disappointment theory, this conceptual framework not only considers emotional factors but also offers a comprehensive depiction of individuals’ decision-making processes amidst uncertainty. The proposed portfolio selection model aims to balance return and risk by maximizing both expected and total utility. The effectiveness of the proposed model is validated through comparisons with three other methods.