Back to Search
Start Over
Dynamic consumption and portfolio choice under prospect theory
- Source :
- Insurance: Mathematics & Economics, 91, 224-237. Elsevier
- Publication Year :
- 2020
- Publisher :
- Elsevier BV, 2020.
-
Abstract
- This paper explicitly derives the optimal dynamic consumption and portfolio choice of an individual with prospect theory preferences. The individual is loss averse, endogenously updates his reference level over time, and distorts probabilities. We show that the optimal consumption strategy is rather insensitive to economic shocks. In particular, in case the individual sufficiently overweights unlikely unfavorable events, our model generates an endogenous floor on consumption. As a result, an individual with prospect theory preferences typically implements a (very) conservative portfolio strategy. We discuss implications of our results for the design of investment-linked annuity products.
- Subjects :
- Mathematics, Interdisciplinary Applications
SELECTION
DISAPPOINTMENT
Statistics and Probability
Economics and Econometrics
Portfolio strategy
Economics
Statistics & Probability
Social Sciences
Optimal annuity design
ASSET PRICES
01 natural sciences
Microeconomics
Loss aversion
010104 statistics & probability
Prospect theory
Business & Economics
Reference level
0502 economics and business
0101 mathematics
Consumption (economics)
RISK
Science & Technology
Optimal portfolio choice
050208 finance
05 social sciences
Social Sciences, Mathematical Methods
DECISION
HABIT FORMATION
LIFE-CYCLE
PARAMETER-FREE ELICITATION
Annuity (European)
Annuity (American)
Endogenous reference level
Physical Sciences
Optimal consumption choice
Portfolio
REGRET THEORY
Statistics, Probability and Uncertainty
Probability weighting
Mathematics
Mathematical Methods In Social Sciences
Subjects
Details
- ISSN :
- 01676687
- Volume :
- 91
- Database :
- OpenAIRE
- Journal :
- Insurance: Mathematics and Economics
- Accession number :
- edsair.doi.dedup.....3cfd3386364f044d3902a1eaaa01d1d0