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  • Benno Torgler,
  • Sascha L. Schmidt
  • Bruno S. Frey

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.

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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 282.

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Date of creation: Apr 2006
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Handle: RePEc:zur:iewwpx:282

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Related research

Keywords: Disposition effect; house money effect; prospect theory; port-folio choice;

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  1. B Kogut & U Zander, 2003. "A memoir and reflection: knowledge and an evolutionary theory of the multinational firm 10 years later," Journal of International Business Studies, Palgrave Macmillan, vol. 34(6), pages 505-515, November.
  2. Glenn Ellison, 2002. "The Slowdown of the Economics Publishing Process," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 947-993, October.
  3. Engers, Maxim & Gans, Joshua S, 1998. "Why Referees Are Not Paid (Enough)," American Economic Review, American Economic Association, vol. 88(5), pages 1341-49, December.
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Cited by:
  1. Oswald, Andrew J., 2008. "Can We Test for Bias in Scientific Peer-Review?," IZA Discussion Papers 3665, Institute for the Study of Labor (IZA).

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