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How Investors Face Financial Risk Loss Aversion and Wealth AllocationErick Williams RengifoFordham University Emanuela TrifanCatholic University of Leuven, Center for Operation Research and Econometrics (CORE); Darmstadt University of Technology - Institute of Economics - Department of Applied Econometrics; Department of Economics, Chair of Econometrics January 2008 Fordham University Department of Economics Discussion Paper No. 2008-01 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.
Number of Pages in PDF File: 51 Keywords: Prospect theory, myopic loss aversion, Value-at-Risk, portfolio evaluation, capital allocation JEL Classification: G10, G11, D81, E27 working papers seriesDate posted: February 27, 2008Suggested CitationContact Information
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