Loss Aversion with Multiple Investment Goals

53 Pages Posted: 14 Aug 2009 Last revised: 29 Sep 2011

See all articles by Enrico G. De Giorgi

Enrico G. De Giorgi

University of St. Gallen - SEPS: Economics and Political Sciences

Date Written: September 8, 2011

Abstract

This paper presents a time-continuous portfolio selection model with loss averse investors, who possess multiple investment goals at different time horizons. The model assumes partial narrow framing. Investors follow a two-step approach. First, they optimally allocate wealth among investment goals. Second, they determine an optimal investment strategy for each investment goal separately. We show that when loss aversion is according to the experimental findings, investors mainly invest their wealth to reach long-term goals and adopt investment strategies with high leverage to reach short-term goals. The overall strategy also display high leverage. The same patterns is observed when loss aversion is extreme and goals are very ambitious. By contrast, when loss aversion is extreme but goals are not too ambitious, investors mainly invest to reach short-term goals and adopt safe investment strategies for this purpose.

Keywords: loss aversion, risk seeking, mental accounting, narrow framing, portfolio selection.

JEL Classification: D10, G11

Suggested Citation

De Giorgi, Enrico G., Loss Aversion with Multiple Investment Goals (September 8, 2011). Available at SSRN: https://ssrn.com/abstract=1448627 or http://dx.doi.org/10.2139/ssrn.1448627

Enrico G. De Giorgi (Contact Author)

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

Department of Economics
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