Portfolio Choice with Loss Aversion, Asymmetric Risk-Taking Behavior and Segregation of Riskless Opportunities
AbstractIn this paper we present a two period model, where the agent's preferences are described by prospect theory as proposed by Kahneman and Tversky. We solve for the agent's portfolio decision. Our findings are that the changes in portfolio weights depend crucially on the reference point and the ratio between the reference point and the current wealth, and thus only indirectly on the performance of the risky asset. Our model explains why investor keep on holding, or even buy, loosing investments.
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Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 06-27.
Length: 49 pages
Date of creation: May 2005
Date of revision: Apr 2006
Disposition e ect; house money e ect; prospect theory; portfolio choice;
Find related papers by JEL classification:
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- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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