Investment decisions with loss aversion over relative consumption

Georg Gebhardt

Journal of Economic Behavior & Organization, 2011, vol. 80, issue 1, 68-73

Abstract: We study an exchange economy in which investors are loss averse over relative consumption, that is, they suffer a utility loss if they consume less than members of their reference group. As a consequence there is an incentive to hold the same portfolio of risky assets as the reference group. Thus, risk premia can be supported in equilibrium that diverge from the risk premia obtained without loss aversion over relative consumption. This effect may be used to explain time-varying risk premia that are empirically observed for many assets.

Keywords: Loss aversion; Relative consumption (search for similar items in EconPapers)
JEL-codes: D91 E22 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:80:y:2011:i:1:p:68-73

DOI: 10.1016/j.jebo.2011.02.011

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