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Portfolio Choice with Loss Aversion, Asymmetric Risk-Taking Behavior and Segregation of Riskless Opportunities

Author

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  • Martin Vlcek

    (Institute for Empirical Research in Economics, University of Zurich)

Abstract

In 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.

Suggested Citation

  • Martin Vlcek, 2006. "Portfolio Choice with Loss Aversion, Asymmetric Risk-Taking Behavior and Segregation of Riskless Opportunities," Swiss Finance Institute Research Paper Series 06-27, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0627
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    File URL: http://ssrn.com/abstract=948644
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    Citations

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    Cited by:

    1. José Luiz Barros Fernandes & Juan Ignacio Peña & Benjamin Miranda Tabak, 2009. "Behavior Finance and Estimation Risk in Stochastic Portfolio Optimization," Working Papers Series 184, Central Bank of Brazil, Research Department.
    2. Jakusch, Sven Thorsten & Meyer, Steffen & Hackethal, Andreas, 2019. "Taming models of prospect theory in the wild? Estimation of Vlcek and Hens (2011)," SAFE Working Paper Series 146, Leibniz Institute for Financial Research SAFE, revised 2019.
    3. N. Grishina & C. A. Lucas & P. Date, 2017. "Prospect theory–based portfolio optimization: an empirical study and analysis using intelligent algorithms," Quantitative Finance, Taylor & Francis Journals, vol. 17(3), pages 353-367, March.

    More about this item

    Keywords

    Disposition e ect; house money e ect; prospect theory; portfolio choice;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • 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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