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Loss Aversion with Multiple Investment Goals
Journal
Mathematics and Financial Economics
ISSN
1862-9679
ISSN-Digital
1862-9660
Type
journal article
Date Issued
2011-10-01
Author(s)
Abstract
This paper presents a time-continuous portfolio selection model with loss averse investors, who possess multiple investment goals at different time horizons. The model assumes partial narrow framing. Investors follow a two-step approach. First, they optimally allocate wealth among investment goals. Second, they determine an optimal investment strategy for each investment goal separately. We show that when loss aversion is according to the experimental findings, investors mainly invest their wealth to reach long-term goals and adopt investment strategies with high leverage to reach short-term goals. The overall strategy also display high leverage. The same patterns is observed when loss aversion is extreme and goals are very ambitious. By contrast, when loss aversion is extreme but goals are not too ambitious, investors mainly invest to reach short-term goals and adopt safe investment strategies for this purpose.
Language
English
Keywords
loss aversion
risk seeking
mental accounting
narrow framing
portfolio selection.
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Quantitative Economic Methods
Refereed
Yes
Publisher
Springer Verlag
Publisher place
Heidelberg
Volume
5
Number
3
Start page
203
End page
227
Pages
25
Subject(s)
Eprints ID
55579