Mental accounts with horizon and asymmetry preferences

Georges Hübner and Thomas Lejeune

Economic Modelling, 2021, vol. 103, issue C

Abstract: This paper extends mental accounting theory with an investment horizon and asymmetric trade-off between extreme gains and losses. This horizon-asymmetry mental accounting (HAMA) framework widens the spectrum of investors’ optimal portfolio choices considerably. Risk aversion, implied from the mean-variance portfolio theory, and the bond-to-stock ratio decline with the investment horizon. HAMA investors with a large gain–loss asymmetry trade-off are more concerned about skewness and kurtosis rather than variance. To apply the model to United States stock data, we develop a parsimonious semi-parametric version of HAMA that relies on the moments of return distributions. The analysis of optimal portfolios shows that investors who care significantly about upside potential hold asymmetric, leptokurtic, and less diversified allocations.

Keywords: Mental accounts; Portfolio choice; Horizon; Upside potential; Risk aversion (search for similar items in EconPapers)
JEL-codes: D14 G02 G11 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:103:y:2021:i:c:s0264999321002042

DOI: 10.1016/j.econmod.2021.105615

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