Increasing Risk Aversion, Habits, and Life-Cycle Investing

52 Pages Posted: 4 Apr 2015 Last revised: 12 Apr 2016

Kerry Back

Rice University - Jones Graduate School of Business and Department of Economics

Ruomeng Liu

Rice University, Jesse H. Jones Graduate School of Business, Students

Alberto Teguia

Rice University, Jesse H. Jones Graduate School of Business, Students

Date Written: April 11, 2016

Abstract

We derive the optimal portfolio for an investor with increasing relative risk aversion in a complete continuous-time securities market. The IRRA assumption helps to mitigate the criticism of constant relative risk aversion that it implies an unreasonably large aversion to large gambles, given reasonable aversion to small gambles. The model provides theoretical support for the common recommendation of financial advisors that older investors should reduce their allocations to risky assets and is consistent with empirical findings on the relations between age, wealth, and portfolios. Preferences for habits and IRRA preferences have some similar implications and are complementary assumptions.

Keywords: Risk Aversion, Portfolio Choice, Habit

Suggested Citation

Back, Kerry and Liu, Ruomeng and Teguia, Alberto, Increasing Risk Aversion, Habits, and Life-Cycle Investing (April 11, 2016). Available at SSRN: https://ssrn.com/abstract=2589390 or http://dx.doi.org/10.2139/ssrn.2589390

Kerry Back

Rice University - Jones Graduate School of Business and Department of Economics ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Ruomeng Liu

Rice University, Jesse H. Jones Graduate School of Business, Students ( email )

Houston, TX
United States

Alberto Teguia (Contact Author)

Rice University, Jesse H. Jones Graduate School of Business, Students ( email )

Houston, TX
United States

Paper statistics

Downloads
150
Rank
161,324
Abstract Views
639