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A portfolio choice model with utility from anticipation of future consumption and stock market mean reversion

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  • Kuznitz, Arik
  • Kandel, Shmuel
  • Fos, Vyacheslav

Abstract

This paper studies a consumption and portfolio choice problem of a long-lived investor who derives pleasure not only from current consumption, but also from the contemplation of future consumption. The model assumes that all effects of future consumption on current well being are assumed to enter through a single variable--namely, the "stock of future consumption"--analogously to habit-formation models. The main implications of the model concern the incentives for savings, and the fundamental sources of risk in financial markets. It is shown that, when the stock market exhibits mean reversion, deriving utility from anticipation of future consumption has a tremendous effect on portfolio choice. In particular, mean allocation to stocks is much lower under the proposed preferences relative to the standard preferences, especially for high risk averse investors.

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  • Kuznitz, Arik & Kandel, Shmuel & Fos, Vyacheslav, 2008. "A portfolio choice model with utility from anticipation of future consumption and stock market mean reversion," European Economic Review, Elsevier, vol. 52(8), pages 1338-1352, November.
  • Handle: RePEc:eee:eecrev:v:52:y:2008:i:8:p:1338-1352
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    1. Faria, João Ricardo & McAdam, Peter, 2018. "The green golden rule: Habit and anticipation of future consumption," Economics Letters, Elsevier, vol. 172(C), pages 131-133.
    2. Louis Kaplow, 2009. "Utility from Accumulation," NBER Working Papers 15595, National Bureau of Economic Research, Inc.
    3. Manuel A. Gómez, 2022. "The good, the bad and the worse: current, past and future consumption externalities and equilibrium efficiency," Journal of Economics, Springer, vol. 137(3), pages 195-228, December.
    4. JoÃo Ricardo Faria & Peter Mcadam, 2013. "Anticipation of Future Consumption: A Monetary Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2-3), pages 423-447, March.
    5. Merella, Vincenzo & Satchell, Stephen E., 2022. "By force of confidence," European Economic Review, Elsevier, vol. 150(C).
    6. Immordino, Giovanni & Menichini, Anna Maria C. & Romano, Maria Grazia, 2011. "A simple impossibility result in behavioral contract theory," Economics Letters, Elsevier, vol. 113(3), pages 307-309.
    7. Khelifi, Atef, 2014. "Should the Neoclassical growth model include the saving flow in the Utility function?," MPRA Paper 59751, University Library of Munich, Germany.
    8. Gómez, Manuel A., 2021. "On the closed-form solution of an endogenous growth model with anticipated consumption," Journal of Mathematical Economics, Elsevier, vol. 95(C).
    9. Marco Airaudo, 2017. "Complex stock price dynamics under Max Weber’s spirit of capitalism hypothesis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(1), pages 47-73, June.
    10. João Ricardo Faria & Peter McAdam, 2023. "Janus's Money Demand and Time Inconsistency: A New Impossibility Theorem?," Research Working Paper RWP 23-04, Federal Reserve Bank of Kansas City.
    11. Khelifi, Atef, 2014. "Utility from bequeathing savings or Utility from accumulating in the Ramsey growth model," MPRA Paper 60125, University Library of Munich, Germany.
    12. Goncalo Monteiro & Stephen Turnovsky, 2013. "Anticipated Consumption and its Impact on Capital Accumulation and Growth: 'Forward-Looking' vs. 'Backward-Looking' Consumption Reference," CESifo Working Paper Series 4536, CESifo.
    13. Bibaswan Chatterjee & Rolando Escobar‐Posada & Goncalo Monteiro, 2023. "Anticipation in leisure—Effects on labor‐leisure choice," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(2), pages 384-412, June.
    14. Dag Sommervoll, 2013. "Sweet self-deception," Journal of Economics, Springer, vol. 109(1), pages 73-88, May.
    15. Joao R. Faria & Peter Mcadam & Bruno Viscolani, 2023. "Monetary Policy, Neutrality, and the Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(7), pages 1889-1906, October.
    16. KHELIFI, Atef, 2016. "Should the Interest Rate Really Be the Unique Motive to Save in the Ramsey Model?," MPRA Paper 75365, University Library of Munich, Germany.
    17. Vincenzo Merella & Stephen E. Satchell, 2019. "Asset pricing with utility from external anticipation," Carlo Alberto Notebooks 589, Collegio Carlo Alberto.
    18. Goncalo Monteiro & Stephen J. Turnovsky, 2016. "Anticipated consumption and its impact on capital accumulation and growth: “Forward-looking” versus “backward-looking” consumption reference," International Journal of Economic Theory, The International Society for Economic Theory, vol. 12(3), pages 203-232, September.

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