Investors Facing Risk: Prospect Theory and Non-Expected Utility in Portfolio Selection

50 Pages Posted: 21 Sep 2013

See all articles by Erick W. Rengifo

Erick W. Rengifo

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

Emanuela Trifan

Bayerngas Energy

Rossen Trendafilov

St. Thomas Aquinas College - Business School

Date Written: September 18, 2013

Abstract

This paper focuses on the attitude of non-professional investors towards financial losses and their decisions on wealth allocation, and how these change subject to behavioral factors. Our contribution concerns the integration of behavioral elements into the classic portfolio optimization. Individual perceptions are modeled according to an extended prospect-theory framework: Losses loom larger than gains of the same size (loss aversion) and the past risky-portfolio performance changes the subjective valuation of risky investments. The utility of financial investments is overemphasized (myopia). The portfolio model with individual VaR delivers an optimal wealth assignment between risky and risk-free assets.

Keywords: VaR, Non-Professional Investor, Prospect Theory, Non-Expected Utility

JEL Classification: G10, G11, D81, E27

Suggested Citation

Rengifo, Erick W. and Trifan, Emanuela and Trendafilov, Rossen, Investors Facing Risk: Prospect Theory and Non-Expected Utility in Portfolio Selection (September 18, 2013). Available at SSRN: https://ssrn.com/abstract=2327944 or http://dx.doi.org/10.2139/ssrn.2327944

Erick W. Rengifo

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

United States
0017188174061 (Phone)
0017188173518 (Fax)

Emanuela Trifan

Bayerngas Energy ( email )

Albert-Roshupter-Str. 52
Munich, D-81369
Germany

Rossen Trendafilov (Contact Author)

St. Thomas Aquinas College - Business School ( email )

125 NY-340
Sparkill, NY 10976
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
75
Abstract Views
386
rank
312,980
PlumX Metrics