Portfolio Choice with Loss Aversion, Asymmetric Risk-Taking Behavior and Segregation of Riskless Opportunities

52 Pages Posted: 26 Nov 2006

See all articles by Martin Vlcek

Martin Vlcek

University of Zurich - Department of Economics

Date Written: November 2006

Abstract

In this paper we present a two period model, where the agent's preferences are described by prospect theory as proposed by Kahneman and Tversky. We solve for the agent's portfolio decision. Our findings are that the changes in portfolio weights depend crucially on the reference point and the ratio between the reference point and the current wealth, and thus only indirectly on the performance of the risky asset. Our model explains why investor keep on holding, or even buy, loosing investments.

Keywords: Disposition effect, house money effect, prospect theory, portfolio choice

JEL Classification: D01, D14, D81,G11

Suggested Citation

Vlcek, Martin, Portfolio Choice with Loss Aversion, Asymmetric Risk-Taking Behavior and Segregation of Riskless Opportunities (November 2006). Swiss Finance Institute Research Paper No. 27, Available at SSRN: https://ssrn.com/abstract=947078 or http://dx.doi.org/10.2139/ssrn.947078

Martin Vlcek (Contact Author)

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

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