Mental Accounts with Horizon and Asymmetry Preferences
44 Pages Posted: 7 Jan 2017 Last revised: 1 Oct 2019
Date Written: January 4, 2017
The paper extends the mental accounting framework in behavioral finance with investors' time horizon and with asymmetric consideration between extreme gains and losses. This generalized Horizon-Asymmetry Mental Accounting framework (HAMA) has important implications for the determination of investors' risk preferences. Risk aversion and the bond-to-stock ratio are found to decline with investment horizon. Investors who assign a high value to upside potential tend to select portfolios with more important asymmetric and leptokurtic distributions. In its general version, the model does not rely on any specific utility function nor any functional shape for the return distribution. The model is shown to be flexible enough to encompass optimal allocations from the mean-variance portfolio theory, the expected power utility criterion, and a non-Gaussian utility framework.
Keywords: mental accounts, portfolio choice, horizon, upside potential, risk aversion
JEL Classification: G0, G11, C14
Suggested Citation: Suggested Citation