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On Portfolio Choice with Savoring and Disappointment

Author

Listed:
  • Elyès Jouini

    () (PSL Research University, Université Paris-Dauphine, CEREMADE, 75775 Paris Cedex 16, France)

  • Paul Karehnke

    () (PSL Research University, Université Paris-Dauphine, 75775 Paris Cedex 16, France; and Tilburg University, 5000 LE Tilburg, The Netherlands)

  • Clotilde Napp

    () (CNRS and PSL Research University, Université Paris-Dauphine, 75775 Paris Cedex 16, France)

Abstract

We revisit the model proposed by Gollier and Muermann [Gollier C, Muermann A (2010) Optimal choice and beliefs with ex ante savoring and ex post disappointment. Management Sci. 56(8):1272--1284; hereafter, GM]. In the GM model, for a given lottery, agents form anticipated expected payoffs and the set of possible anticipations is assumed to be exogenously fixed. We propose sets of possible anticipations that are endogenously determined. This permits us to compare and evaluate in a consistent manner lotteries with different supports and to revisit the portfolio choice problem. We obtain new conclusions and interesting insights. Our extended model can rationalize a variety of empirically observed puzzles such as a positive demand for assets with negative expected returns, preference for skewed returns, and underdiversification of portfolios. This paper was accepted by Rakesh Sarin, decision analysis.

Suggested Citation

  • Elyès Jouini & Paul Karehnke & Clotilde Napp, 2014. "On Portfolio Choice with Savoring and Disappointment," Management Science, INFORMS, vol. 60(3), pages 796-804, March.
  • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:3:p:796-804
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    File URL: http://dx.doi.org/10.1287/mnsc.2013.1767
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    References listed on IDEAS

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    1. Christian Gollier & Alexander Muermann, 2010. "Optimal Choice and Beliefs with Ex Ante Savoring and Ex Post Disappointment," Management Science, INFORMS, vol. 56(8), pages 1272-1284, August.
    2. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-319, June.
    3. Uri Gneezy & John A. List & George Wu, 2006. "The Uncertainty Effect: When a Risky Prospect is Valued Less than its Worst Possible Outcome," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1283-1309.
    4. Bali, Turan G. & Cakici, Nusret & Whitelaw, Robert F., 2011. "Maxing out: Stocks as lotteries and the cross-section of expected returns," Journal of Financial Economics, Elsevier, vol. 99(2), pages 427-446, February.
    5. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-543, June.
    6. Markus K. Brunnermeier & Jonathan A. Parker & Christian Gollier, 2007. "Optimal Beliefs, Asset Prices, and the Preference for Skewed Returns," American Economic Review, American Economic Association, vol. 97(2), pages 159-165, May.
    7. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-686, May.
    8. Andrew Caplin & John Leahy, 2001. "Psychological Expected Utility Theory and Anticipatory Feelings," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 55-79.
    9. Alok Kumar, 2009. "Who Gambles in the Stock Market?," Journal of Finance, American Finance Association, vol. 64(4), pages 1889-1933, August.
    10. Graham Loomes & Robert Sugden, 1986. "Disappointment and Dynamic Consistency in Choice under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 53(2), pages 271-282.
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    Cited by:

    1. repec:kap:theord:v:84:y:2018:i:3:d:10.1007_s11238-017-9610-3 is not listed on IDEAS
    2. repec:eee:jeborg:v:148:y:2018:i:c:p:34-45 is not listed on IDEAS
    3. Schneider, C.A.R. & Spalt, Oliver, 2016. "Conglomerate investment, skewness, and the CEO long shot bias," Other publications TiSEM 5d9321e2-35ea-40f9-9eae-4, Tilburg University, School of Economics and Management.
    4. repec:kap:theord:v:84:y:2018:i:1:d:10.1007_s11238-017-9629-5 is not listed on IDEAS
    5. repec:oup:revfin:v:21:y:2017:i:6:p:2169-2197. is not listed on IDEAS

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