Optimal saving rules for loss-averse agents under uncertainty
AbstractMost empirical studies assume only monotonic preferences for households. Behavioral research however providessubstantial evidence that preferences for wealth are measured relative to a reference point. In this paper weintroduce and solve a two-period consumption and savings model for a loss-averse agent who measures utilityfrom consumption relative to a benchmark level. The solution is given as a parametric decision rule with oneunknown parameter that depends on the distribution of the return on saving. We find non-linearity in the fractionof wealth saved, where the specific saving pattern depends on the sign of the real return on savings. The amount of saving is nondecreasing in initial wealth and the riskiness of the return distribution.
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Bibliographic InfoArticle provided by Elsevier in its journal Economics Letters.
Volume (Year): 77 (2002)
Issue (Month): 1 (September)
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Web page: http://www.elsevier.com/locate/ecolet
Other versions of this item:
- Arjen H. Siegmann, 2001. "Optimal Saving Rules for Loss-Averse Agents under Uncertainty," Tinbergen Institute Discussion Papers 01-079/4, Tinbergen Institute.
- D1 - Microeconomics - - Household Behavior
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D9 - Microeconomics - - Intertemporal Choice
- E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
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