Investment decisions with loss aversion over relative consumption
AbstractWe study an exchange economy in which investors are loss averse over relative consumption, that is, they suffer a utility loss if they consume less than members of their reference group. As a consequence there is an incentive to hold the same portfolio of risky assets as the reference group. Thus, risk premia can be supported in equilibrium that diverge from the risk premia obtained without loss aversion over relative consumption. This effect may be used to explain time-varying risk premia that are empirically observed for many assets.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Behavior & Organization.
Volume (Year): 80 (2011)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/jebo
Loss aversion; Relative consumption;
Find related papers by JEL classification:
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
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