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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, 2005. "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, revised Apr 2006.
  • Handle: RePEc:chf:rpseri:rp0627
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    File URL: http://ssrn.com/abstract=948644
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    Cited by:

    1. Jose Luiz Barros Fernandes & Juan Ignacio Pena & Benjamin Miranda Tabak, 2010. "Behaviour finance and estimation risk in stochastic portfolio optimization," Applied Financial Economics, Taylor & Francis Journals, vol. 20(9), pages 719-738.

    More about this item

    Keywords

    Disposition e ect; house money e ect; prospect theory; portfolio choice;

    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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