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Loss Aversion with Multiple Investment Goals

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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.
   
type journal paper
   
keywords loss aversion, risk seeking, mental accounting, narrow framing, portfolio selection.
   
project Applying Recent Developments in Computational Statistics to Behavioral Asset Pricing and Portfolio Selection
language English
kind of paper journal article
date of appearance 1-10-2011
journal Mathematics and Financial Economics
publisher Springer Verlag (Heidelberg)
ISSN 1862-9679
ISSN (online) 1862-9660
DOI 10.1007/s11579-011-0057-y
volume of journal 5
number of issue 3
page(s) 203-227
review blind review
   
profile area SEPS - Quantitative Economic Methods
citation De Giorgi, E. (2011). Loss Aversion with Multiple Investment Goals. Mathematics and Financial Economics, 5(3), 203-227, DOI:10.1007/s11579-011-0057-y.