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Investment decisions with loss aversion over relative consumption

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  • Gebhardt, Georg
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    Abstract

    We 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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    File URL: http://www.sciencedirect.com/science/article/pii/S0167268111000758
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

    Volume (Year): 80 (2011)
    Issue (Month): 1 ()
    Pages: 68-73

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    Handle: RePEc:eee:jeborg:v:80:y:2011:i:1:p:68-73

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    Web page: http://www.elsevier.com/locate/jebo

    Related research

    Keywords: Loss aversion; Relative consumption;

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    References

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    1. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory And Asset Prices," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 1-53, February.
    2. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
    3. Shlomo Benartzi & Richard H. Thaler, 1993. "Myopic Loss Aversion and the Equity Premium Puzzle," NBER Working Papers 4369, National Bureau of Economic Research, Inc.
    4. Gomez, Juan-Pedro, 2007. "The impact of keeping up with the Joneses behavior on asset prices and portfolio choice," Finance Research Letters, Elsevier, vol. 4(2), pages 95-103, June.
    5. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
    6. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory Of Fairness, Competition, And Cooperation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 817-868, August.
    7. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
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    Cited by:
    1. Lahno, Amrei M., 2014. "Social anchor effects in decision-making under ambiguity," Discussion Papers in Economics 20960, University of Munich, Department of Economics.

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