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Dynamic portfolio choice with regret aversion and rejoicing

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  • Doreleijers, Djep
  • Hambel, Christoph

Abstract

This paper analytically assesses the optimal investment problem for a regret-averse investor. Extending CRRA utility to regret and rejoicing, we propose a multiplicative regret-rejoicing utility function. The agent can invest in a risk-free asset and in a risky asset. We derive closed-form solutions and show how the optimal investment strategy depends on the chosen benchmark investment strategy if she feels regret due to foregone profits. The more regret-averse the agent is, the more she is tilted towards the benchmark strategies. We extend this approach to settings with multiple benchmarks and provide some numerical illustrations.

Suggested Citation

  • Doreleijers, Djep & Hambel, Christoph, 2025. "Dynamic portfolio choice with regret aversion and rejoicing," Finance Research Letters, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:finlet:v:84:y:2025:i:c:s1544612325010207
    DOI: 10.1016/j.frl.2025.107762
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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