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Mean-Variance Portfolio Selection with Reference Dependent Preferences

Author

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  • Sergiy Gerasymchuk

    (Advanced School of Economics, University of Venice)

Abstract

We study S-shaped utility maximization for the standard portfolio selection problem with one risky and one risk-free asset. We derive a mean-variance criterium of choice, which preserves reference dependence and the reflection effect. Subsequently, we study diversification possibilities and obtain the demand for the risky asset. We close the paper with an alternative interpretation of the criterium in terms of target-based decision making.

Suggested Citation

  • Sergiy Gerasymchuk, 2007. "Mean-Variance Portfolio Selection with Reference Dependent Preferences," Working Papers 150, Department of Applied Mathematics, Università Ca' Foscari Venezia.
    • Handle: RePEc:vnm:wpaper:150
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    References listed on IDEAS

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    1. Herbert A. Simon, 1955. "A Behavioral Model of Rational Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 69(1), pages 99-118.
    2. Cecilia Chaing & Lindsay McSweeney, 2010. "A Behavioral Model of Rational Choice," CPI Journal, Competition Policy International, vol. 6.
    3. Pyle, David H & Turnovsky, Stephen J, 1970. "Safety-First and Expected Utility Maximization in Mean-Standard Deviation Portfolio Analysis," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 75-81, February.
    4. Levy, Haim & Wiener, Zvi, 1998. "Stochastic Dominance and Prospect Dominance with Subjective Weighting Functions," Journal of Risk and Uncertainty, Springer, vol. 16(2), pages 147-163, May-June.
    5. Marco LiCalzi, 2005. "A language for the construction of preferences under uncertainty," Game Theory and Information 0509002, University Library of Munich, Germany.
    6. Lester G. Telser, 1955. "Safety First and Hedging," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 23(1), pages 1-16.
    7. Erio Castagnoli & Marco LiCalzi, 2005. "Expected utility without utility," Game Theory and Information 0508004, University Library of Munich, Germany.
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    Cited by:

    1. de Farias Neto, Joao Jose, 2008. "S-shaped utility, subprime crash and the black swan," MPRA Paper 12122, University Library of Munich, Germany.
    2. Sergiy Gerasymchuk, 2008. "Asset return and wealth dynamics with reference dependent preferences and heterogeneous beliefs," Working Papers 160, Department of Applied Mathematics, Università Ca' Foscari Venezia.

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    Keywords

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    JEL classification:

    • 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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