Intertemporal Preference with Loss Aversion: Consumption and Risk Attitude

62 Pages Posted: 23 Oct 2019 Last revised: 15 Nov 2021

See all articles by Kyoung Jin Choi

Kyoung Jin Choi

University of Calgary - Haskayne School of Business

Junkee Jeon

Kyung Hee University - Department of Applied Mathematics

Hyeng Keun Koo

Ajou University - Department of Business Administration

Date Written: September 21, 2021

Abstract

We study the consumption and portfolio selection problem of economic agents who face consumption irreversibility: there is disutility from changing consumption levels. The derived preference exhibits loss aversion toward a consumption gamble with the previous consumption level being the reference point. The optimization problem involves a non-monotonic and non-concave utility function. We derive a closed-form solution by combining a duality method and the super-contact principle. We show that the consumption policy involves an inaction interval for the consumption-permanent income ratio, which are consistent with various empirical regularities about consumption. The effective risk aversion derived from agents' optimal portfolio choice exhibits an inverted U-shape in the inaction interval.

Keywords: consumption irreversibility, intertemporal loss aversion, excess sensitivity and smoothness, asymmetric sensitivities, consumption heterogeneity, U-shaped risky share

JEL Classification: C61, D11, D15, E21, G11

Suggested Citation

Choi, Kyoung Jin and Jeon, Junkee and Koo, Hyeng Keun, Intertemporal Preference with Loss Aversion: Consumption and Risk Attitude (September 21, 2021). Journal of Economic Theory, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3469765 or http://dx.doi.org/10.2139/ssrn.3469765

Kyoung Jin Choi (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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

Junkee Jeon

Kyung Hee University - Department of Applied Mathematics ( email )

1732 Deogyeong-daero, Giheung-gu,
Yongin, 130-701
Korea, Republic of (South Korea)

HOME PAGE: http://sites.google.com/site/junkeejeon/home

Hyeng Keun Koo

Ajou University - Department of Business Administration ( email )

206 Worldcup-ro
Yeongtong-gu
Suwon, 443-749
Korea, Republic of (South Korea)

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