How Investors Face Financial Risk Loss Aversion and Wealth Allocation

Erick Rengifo and Emanuela Trifan
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Erick Rengifo: Fordham University, Department of Economics
Emanuela Trifan: J.W. Goethe University Frankfurt am Main, Department of Economics

Fordham Economics Discussion Paper Series from Fordham University, Department of Economics

Abstract: We study how the wealth-allocation decisions and the loss aversion of non-professional investors change subject to behavioral factors. The optimal wealth assignment between risky and risk-free assets results within a VaR portfolio model, where risk is individually assessed according to an extended prospect-theory framework. We show how the past performance and the portfolio evaluation frequency impact investor behavior. Myopic loss aversion holds at different evaluation frequencies. One year is the optimal frequency at which, under practical constraints, risky holdings are maximized. Previous research using standard VaR-significance levels may underestimate the loss aversion of individual investors.

Keywords: Prospect theory; myopic loss aversion; Value-at-Risk; portfolio evaluation; capital allocation (search for similar items in EconPapers)
JEL-codes: D81 E27 G10 G11 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-upt
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