scholarly journals Consumption and Portfolio Choice Under Loss Aversion and Endogenous Updating of the Reference Level

2020 ◽  
Vol 66 (9) ◽  
pp. 3927-3955 ◽  
Author(s):  
Servaas van Bilsen ◽  
Roger J. A. Laeven ◽  
Theo E. Nijman
Keyword(s):  
Portfolio Choice ◽  
Risk Taking ◽  
Loss Aversion ◽  
Investment Strategy ◽  
Risk Exposure ◽  
Reference Level ◽  
Current Consumption ◽  
Reduce Risk ◽  
Normal States ◽  
The Individual

We explicitly derive and explore the optimal consumption and portfolio policies of a loss-averse individual who endogenously updates his or her reference level over time. We find that the individual protects current consumption by delaying painful reductions in consumption after a drop in wealth, and increasingly so with higher degrees of endogeneity. The incentive to protect current consumption is stronger with a medium wealth level than with a high or low wealth level. Furthermore, this individual adopts a conservative investment strategy in normal states and typically a more aggressive strategy in good and bad states. Endogeneity of the reference level increases overall risk-taking and generates an incentive to reduce risk exposure with age even without human capital. The welfare loss that this individual would suffer under the conventional constant relative risk aversion (CRRA) consumption and portfolio policies easily exceeds 10%. This paper was accepted by Tyler Shumway, finance.

scholarly journals Institutional Investors, Past Performance, and Dynamic Loss Aversion

2009 ◽  
Vol 44 (1) ◽  
pp. 155-188 ◽  
Author(s):  
Paul G. J. O’Connell ◽  
Melvyn Teo
Keyword(s):  
Risk Taking ◽  
Loss Aversion ◽  
Institutional Investors ◽  
Disposition Effect ◽  
Past Performance ◽  
Increase Risk ◽  
Reduce Risk ◽  
Proprietary Database ◽  
Dynamic Loss ◽  
Gains And Losses

AbstractUsing a proprietary database of currency trades, this paper explores the effects of trading gains and losses on risk-taking among large institutional investors. We find that institutional investors, unlike individuals, are not prone to the disposition effect. Instead, institutions aggressively reduce risk following losses and mildly increase risk following gains. This asymmetry is more pronounced later in the calendar year and among older and more experienced funds. We show that such performance dependence is consistent with dynamic loss aversion (Barberis, Huang, and Santos (2001)) and overconfidence. In addition, prior institutional gains and losses have palpable implications for future prices.

Three Challenges for the Social Investment Strategy

2017 ◽  
Author(s):  
John Myles
Keyword(s):  
Economic Growth ◽  
Population Aging ◽  
Investment Strategy ◽  
First Century ◽  
Social Investment ◽  
Current Consumption ◽  
The Social ◽  
Post War ◽  
Post Industrial ◽  
Wage Outcomes

Three challenges are highlighted in this chapter to the realization of the social investment strategy in our twenty-first-century world. The first such challenge—intertemporal politics—lies in the term ‘investment’, a willingness to forego some measure of current consumption in order to realize often uncertain gains in the future that would not occur otherwise, such as better schooling, employment, and wage outcomes for the next generation. Second, the conditions that enabled our post-war predecessors to invest heavily in future-oriented public goods—a sustained period of economic growth and historically exceptional tolerance for high levels of taxation—no longer obtain. Third, the millennial cohorts who will bear the costs of a new, post-industrial, investment strategy are more economically divided than earlier cohorts and face multiple demands raised by issues such as population aging and global warming, among others.

scholarly journals Prey reduce risk-taking and abundance in the proximity of predators

2016 ◽  
pp. zow114 ◽  
Author(s):  
Anders. P. Møller ◽  
Zbigniew Kwiecinski ◽  
Piotr Tryjanowski
Keyword(s):  
Risk Taking ◽  
Reduce Risk

Are the saving decision patterns of bank customers also clouded by psychological biases? Evidence from Ghana

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Joseph Emmanuel Tetteh ◽  
Christopher Boachie
Keyword(s):  
Decision Making ◽  
Loss Aversion ◽  
Design Methodology ◽  
Weighted Least Squares ◽  
Least Squares Regression ◽  
Individual Decision ◽  
Content Type ◽  
Saving Decisions ◽  
The Individual ◽  
Practical Implications

PurposeThis paper attempts to investigate the influence of psychological biases on saving decision-making of bank customers in Ghana.Design/methodology/approachIt employs weighted least squares regression to test the effect of psychological biases on savings decisions of bank customers.FindingsThe findings show that all the nine psychological biases, namely mental accounting, availability, loss aversion, representativeness, anchoring, overconfidence, status quo, framing effect and disposition effect employed for the study have a significant influence on saving decision of bank customers. The results depict that psychological biases are entrenched in the saving pattern of bank customers in Ghana.Practical implicationsFor policy purposes, the study recommends that bank customers need to enhance their knowledge of psychological biases in order to improve their gains from savings, and not to fall prey to these prejudices. The satisfied customer is a dependable source of bank viability and survival.Originality/valueTo the best of the knowledge of the author, this study provides the first empirical evidence of the influence of psychological biases on saving decisions of bank customers in Ghana. The findings of this study will enhance knowledge on the influence of psychological biases on individual decision-making and will accentuate the fact that the individual is not an entirely rational being.

Agreeableness and neuroticism predict being more concerned about COVID-19 and bothered by friends’ risky behavior

2021 ◽  
Author(s):  
Jessica Daphne Ayers ◽  
Diego Guevara Beltran ◽  
Andrew Van Horn ◽  
Lee Cronk ◽  
Hector Hurmuz-Sklias ◽  
...  
Keyword(s):  
Public Health ◽  
Personality Traits ◽  
Risk Taking ◽  
Risky Behavior ◽  
Risky Behaviors ◽  
Reduce Risk

Given the importance of friendships during challenging times and the mixed associations reported between personality traits and disease-related behaviors, we investigated the influence of personality traits on friendships during the COVID-19 pandemic and how both influenced risky behaviors. In November 2020, we asked participants about their reactions to friends’ behavior as part of a larger study. We found that agreeableness and neuroticism predicted participants being more concerned about COVID-19 and bothered by friends’ risky behavior, and extraversion predicted enjoying helping friends during the pandemic. Our results suggest that personality influences how individuals cope with their friends’ risky behaviors. This work could be relevant for developing interventions to reduce risk taking during the pandemic, such as using friendships to reinforce adherence to public health guidelines.

scholarly journals Consistency and Heterogeneity of Individual Behavior under Uncertainty

2007 ◽  
Vol 97 (5) ◽  
pp. 1921-1938 ◽  
Author(s):  
Syngjoo Choi ◽  
Raymond Fisman ◽  
Douglas Gale ◽  
Shachar Kariv
Keyword(s):  
Utility Function ◽  
Portfolio Choice ◽  
Individual Behavior ◽  
Parameter Estimates ◽  
Individual Subject ◽  
Individual Level ◽  
Study Behavior ◽  
The Individual ◽  
Two Parameter ◽  
Good Interpretation

By using graphical representations of simple portfolio choice problems, we generate a very rich dataset to study behavior under uncertainty at the level of the individual subject. We test the data for consistency with the maximization hypothesis, and we estimate preferences using a two-parameter utility function based on Faruk Gul (1991). This specification provides a good interpretation of the data at the individual level and can account for the highly heterogeneous behaviors observed in the laboratory. The parameter estimates jointly describe attitudes toward risk and allow us to characterize the distribution of risk preferences in the population. (JEL D11, D14, D81, G11)

scholarly journals A Simulation Approach to Statistical Estimation of Multiperiod Optimal Portfolios

2012 ◽  
Vol 2012 ◽  
pp. 1-13
Author(s):  
Hiroshi Shiraishi
Keyword(s):  
Portfolio Choice ◽  
Value Function ◽  
Sample Path ◽  
Optimal Investment ◽  
Investment Strategy ◽  
Time Dependency ◽  
Portfolio Rebalancing ◽  
Sample Paths ◽  
Optimal Investment Strategy ◽  
The Value Function

This paper discusses a simulation-based method for solving discrete-time multiperiod portfolio choice problems under AR(1) process. The method is applicable even if the distributions of return processes are unknown. We first generate simulation sample paths of the random returns by using AR bootstrap. Then, for each sample path and each investment time, we obtain an optimal portfolio estimator, which optimizes a constant relative risk aversion (CRRA) utility function. When an investor considers an optimal investment strategy with portfolio rebalancing, it is convenient to introduce a value function. The most important difference between single-period portfolio choice problems and multiperiod ones is that the value function is time dependent. Our method takes care of the time dependency by using bootstrapped sample paths. Numerical studies are provided to examine the validity of our method. The result shows the necessity to take care of the time dependency of the value function.

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