On Portfolio Choice with Savoring and Disappointment

Management Science, Forthcoming

25 Pages Posted: 10 Jul 2013

See all articles by Elyes Jouini

Elyes Jouini

Univ. Paris Dauphine - CEREMADE

Paul Karehnke

ESCP Europe - Department of Finance

Clotilde Napp

CNRS and Université Paris-Dauphine

Date Written: July 10, 2013

Abstract

We revisit the model proposed by Gollier and Muermann (see Gollier, C. and A. Muermann, 2010, Optimal choice and beliefs with exante savoring and ex-post disappointment, Management Sci., 56, 1272-1284, hereafter GM). In GM, for a given lottery, agents form anticipated expected payoffs and the set of possible anticipations is assumed to be exogenously fixed. We rather propose sets of possible anticipations which are endogenously determined. This permits to compare and evaluate in a consistent manner lotteries with different supports and to revisit the portfolio choice problem. We obtain new conclusions and interesting insights. Our extended model can rationalize a variety of empirically observed puzzles like a positive demand for assets with negative expected returns, preference for skewed returns and under-diversification of portfolios.

Keywords: endogenous beliefs, anticipatory feelings, disappointment, optimism, portfolio choice, skewness, under-diversification

JEL Classification: D81, G11

Suggested Citation

Jouini, Elyes and Karehnke, Paul and Napp, Clotilde, On Portfolio Choice with Savoring and Disappointment (July 10, 2013). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2291836

Elyes Jouini

Univ. Paris Dauphine - CEREMADE ( email )

Place du Marechal de Lattre de Tassigny
Paris Cedex 16, 75775
France
+ 33 1 44 05 46 75 (Phone)
+ 33 1 44 05 45 99 (Fax)

Paul Karehnke (Contact Author)

ESCP Europe - Department of Finance ( email )

Paris Campus
79, Avenue de la Republique
Paris, 75011
France

HOME PAGE: http://sites.google.com/site/paulkarehnke/

Clotilde Napp

CNRS and Université Paris-Dauphine ( email )

Place de Lattre de Tassigny
Paris, 75775
France

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