A Two-Period Behavioral Consumption-Investment Model

Recently cumulative prospect theory (CPT) serves as a dominant tool for descriptive decisions under risk and uncertainty which can capture investors' psychology and emotions. In this paper, we consider a two-period consumption-investment decision model based on CPT. The CPT investor needs to balance the allocation of her initial wealth among the current consumption in the first period, the investment on the risky asset and the investment on the risk-free asset in the second period to maximize her total CPT utility. We derive the optimal consumption-investment strategies for the two cases that the difference of the initial wealth and the sum of the two reference points in the two periods is larger than zero and less than zero, respectively. Furthermore, we also present the optimal consumption-investment strategies when the utility is linear.