Portfolio Choice with Loss Aversion, Asymmetric Risk-Taking Behavior and Segregation of Riskless Opportunities

Martin Vlcek
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Martin Vlcek: Institute for Empirical Research in Economics, University of Zurich

No 06-27, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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.

Keywords: Disposition e ect; house money e ect; prospect theory; portfolio choice (search for similar items in EconPapers)
JEL-codes: D01 D14 D81 G11 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2006-04
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Citations: View citations in EconPapers (3)

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