Prospect theory and portfolio selection
Michael J. Best and
Robert R. Grauer
Journal of Behavioral and Experimental Finance, 2016, vol. 11, issue C, 13-17
We examine prospect theory portfolios in asset allocation settings that include riskfree lending and borrowing, subject to margin constraints, and short sales restrictions on risky assets. In static settings, we focus on myopic loss aversion, which assumes loss averse investors are willing to take more risk if they evaluate their investment performance infrequently. The results show the portfolios, including those of the investor with a loss aversion coefficient of 2.25, are extremely unstable across decision horizons. In dynamic settings, the portfolios of investors with loss aversion on the order of two perform well. But in some instances the house money effect, where the position of the kink and the investor’s loss aversion changes with gains and losses, has a large negative impact on the wealth of these investors.
Keywords: Portfolio choice; Prospect theory; Kinked linear utility (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
References: Add references at CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:11:y:2016:i:c:p:13-17
Access Statistics for this article
Journal of Behavioral and Experimental Finance is currently edited by Michael Dowling and JÃ¼rgen Huber
More articles in Journal of Behavioral and Experimental Finance from Elsevier
Series data maintained by Dana Niculescu ().