How Investors Face Financial Risk Loss Aversion and Wealth Allocation
Erick Williams Rengifo
Catholic 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
Fordham University Department of Economics Discussion Paper No. 2008-01
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, E27working papers series
Date posted: February 27, 2008
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.329 seconds