Tootfinder

Behavioral Probability Weighting and Portfolio Optimization under Semi-Heavy Tails
Ayush Jha, Abootaleb Shirvani, Ali M. Jaffri, Svetlozar T. Rachev, Frank J. Fabozzi
https://arxiv.org/abs/2507.04208

Behavioral Probability Weighting and Portfolio Optimization under Semi-Heavy Tails
This paper develops a unified framework that integrates behavioral distortions into rational portfolio optimization by extracting implied probability weighting functions (PWFs) from optimal portfolios modeled under Gaussian and Normal-Inverse-Gaussian (NIG) return distributions. Using DJIA constituents, we construct mean-CVaR99 frontiers, alongwith Sharpe- and CVaR-maximizing portfolios, and estimate PWFs that capture nonlinear beliefs consistent with fear and greed. We show that increasing tai…