scholarly journals Optimal Consumption and Portfolio Choice with Loss Aversion

2016 ◽  
Author(s):  
Giuliano Curatola
Keyword(s):  
Portfolio Choice ◽  
Loss Aversion ◽  
Optimal Consumption

scholarly journals Cumulative prospect theory and deferred annuities

2019 ◽  
Vol 11 (3) ◽  
pp. 277-293 ◽  
Author(s):  
Anran Chen ◽  
Steven Haberman ◽  
Stephen Thomas
Keyword(s):  
Prospect Theory ◽  
Loss Aversion ◽  
Design Methodology ◽  
Behavioral Model ◽  
Cumulative Prospect Theory ◽  
Optimal Consumption ◽  
Content Type ◽  
Deferred Annuity ◽  
To Receive

Purpose Although it has been proved theoretically that annuities can provide optimal consumption during one’s retirement period, retirees’ reluctance to purchase annuities is a long-standing puzzle. The purpose of this paper is to use behavioral model to analyze the low demand for immediate annuities. Design/methodology/approach The authors employ cumulative prospect theory (CPT), which contains both loss aversion and probability transformations, to analyze the annuity puzzle. Findings The authors show that CPT can explain the unattractiveness of immediate annuities. It also shows that retirees would be willing to buy a long-term deferred annuity at retirement. By considering each component from CPT in turn, the loss aversion is found to be the major reason that stops people from buying an annuity while the survival rate transformation is an important factor affecting the decision of when to receive annuity incomes. Originality/value This paper identifies CPT as one of the reasons for the low demand of immediate annuities. It further suggests that long-term deferred annuities could overcome behavioral obstacles and become popular among retirees.

OPTIMAL PORTFOLIO UNDER STATE-DEPENDENT EXPECTED UTILITY

2018 ◽  
Vol 21 (03) ◽  
pp. 1850013 ◽  
Author(s):  
CAROLE BERNARD ◽  
STEVEN VANDUFFEL ◽  
JIANG YE
Keyword(s):  
Portfolio Choice ◽  
Expected Utility ◽  
Loss Aversion ◽  
Reference Point ◽  
Joint Distribution ◽  
Optimal Portfolio ◽  
Characterization Result ◽  
Terminal Wealth ◽  
Utility Maximizer ◽  
State Dependent

We derive the optimal portfolio for an expected utility maximizer whose utility does not only depend on terminal wealth but also on some random benchmark (state-dependent utility). We then apply this result to obtain the optimal portfolio of a loss-averse investor with a random reference point (extending a result of Berkelaar et al. (2004) Optimal portfolio choice under loss aversion, The Review of Economics and Statistics 86 (4), 973–987). Clearly, the optimal portfolio has some joint distribution with the benchmark and we show that it is the cheapest possible in having this distribution. This characterization result allows us to infer the state-dependent utility function that explains the demand for a given (joint) distribution.

scholarly journals Optimal Portfolio Choice under Loss Aversion

2004 ◽  
Vol 86 (4) ◽  
pp. 973-987 ◽  
Author(s):  
Arjan B. Berkelaar ◽  
Roy Kouwenberg ◽  
Thierry Post
Keyword(s):  
Portfolio Choice ◽  
Loss Aversion ◽  
Optimal Portfolio

scholarly journals Optimal Portfolio Choice Under Loss Aversion

2000 ◽  
Author(s):  
Arjan B. Berkelaar ◽  
Roy R.P. Kouwenberg ◽  
Thierry Post
Keyword(s):  
Portfolio Choice ◽  
Loss Aversion ◽  
Optimal Portfolio

Humans, Econs and Portfolio Choice

2016 ◽  
Vol 07 (02) ◽  
pp. 1750001 ◽  
Author(s):  
Michael J. Best ◽  
Robert R. Grauer
Keyword(s):  
Prospect Theory ◽  
Portfolio Choice ◽  
Loss Aversion ◽  
Asset Allocation ◽  
Power Utility ◽  
Numerical Example ◽  
Portfolio Choices ◽  
Out Of Sample ◽  
Finance Theory ◽  
Mean Variance

We compare the portfolio choices of Humans — prospect theory investors — to the portfolio choices of Econs — power utility and mean-variance (MV) investors. In a numerical example, prospect theory portfolios are decidedly unreasonable. In an in-sample asset allocation setting, the prospect theory results are consistent with myopic loss aversion. However, the portfolios are extremely unstable. The power utility and MV results are consistent with traditional finance theory, where the portfolios are stable across decision horizons. In an out-of-sample asset allocation setting, the power utility and portfolios outperform the prospect theory portfolios. Nonetheless the prospect theory portfolios with loss aversion coefficients of 2.25 and 2 perform well.

scholarly journals Consumption and Portfolio Choice under Internal Multiplicative Habit Formation

2019 ◽  
Vol 55 (7) ◽  
pp. 2334-2371
Author(s):  
Servaas van Bilsen ◽  
A. Lans Bovenberg ◽  
Roger J. A. Laeven
Keyword(s):  
Portfolio Choice ◽  
Habit Formation ◽  
Optimal Consumption ◽  
Investment Behavior ◽  
Risky Assets ◽  
General Utility ◽  
Marginal Propensity To Consume ◽  
Investment Opportunities ◽  
Marginal Propensity ◽  
Optimal Consumption And Investment

This paper explores the optimal consumption and investment behavior of an individual who derives utility from the ratio between his consumption and an endogenous habit. We obtain closed-form policies under general utility functionals and stochastic investment opportunities by developing a nontrivial linearization to the budget constraint. This enables us to explicitly characterize how habit formation affects the marginal propensity to consume and optimal stock–bond investments. We also show that in a setting that combines habit formation with Epstein–Zin utility, consumption no longer grows at unrealistically high rates at high ages and investments in risky assets decrease.

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