How Investors Face Financial Risk Loss Aversion and Wealth Allocation

Fordham University Department of Economics Discussion Paper No. 2008-01

51 Pages Posted: 27 Feb 2008

See all articles by Erick W. Rengifo

Erick W. Rengifo

Fordham University - Department of Economics - Center for International Policy Studies (CIPS)

Emanuela Trifan

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 2008

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

JEL Classification: G10, G11, D81, E27

Suggested Citation

Rengifo, Erick W. and Trifan, Emanuela, How Investors Face Financial Risk Loss Aversion and Wealth Allocation (January 2008). Fordham University Department of Economics Discussion Paper No. 2008-01. Available at SSRN: https://ssrn.com/abstract=1098972 or http://dx.doi.org/10.2139/ssrn.1098972

Erick W. Rengifo (Contact Author)

Fordham University - Department of Economics - Center for International Policy Studies (CIPS) ( email )

United States
0017188174061 (Phone)
0017188173518 (Fax)

Emanuela Trifan

Catholic University of Leuven, Center for Operation Research and Econometrics (CORE) ( email )

34, Voie du Roman Pays
Louvain-la-Neuve, 1348
Belgium

Darmstadt University of Technology - Institute of Economics - Department of Applied Econometrics ( email )

Residenzschloss, Marktplatz 15
Darmstadt, 64283
Germany
+49(0)6151 166506 (Phone)
+49(0)6151 165652 (Fax)

HOME PAGE: http://www.tu-darmstadt.de/fb/fb1/vwl2/

Department of Economics, Chair of Econometrics ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

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