Investment Choices with Envy and Altruism

Abstract:     
The effect of envy and altruism on investment choices is analyzed by employing bivariate utility-free Stochastic Dominance (SD) rules. We find that correlation loving or correlation aversion (between the individual’s wealth and the peer group’s wealth) greatly affects choices. The positive result is that the bivariate SD efficient set always contains the univaraite SD efficient set, hence economic loss may be avoided. The negative result is that envious persons may prefer inferior First-degree SD (FSD) investment choice provided that their peer group is also worse off. Surprisingly, also persons with some non-pathological altruism preferences may choose an inferior FSD prospect, inducing a reduction in the univariate expected utility of both the individual and the peer group.

Number of Pages in PDF File: 41

Keywords: bivariate preferences, envy, altruism, expected utility burning, contingent money burning, stochastic dominance, decision-making, efficiency analysis

JEL Classification: A13, C02, C91, D64, D81, G11

working papers series