دانلود رایگان مقاله انگلیسی انتخاب پورتفوی در تعادل شخصی - الزویر 2018

abstract

This paper finds that in portfolio choice where reference point arises endogenously in personal equilibria, investors behave as if they had a concave probability weighting function. This finding establishes a link between the reference-dependent utility and the rank-dependent utility theories.

4. Concluding remarks

With a piecewise linear gain–loss value function and a continuous choice set, we show that both UPE and CPE are unique, and an investor in both UPE and CPE behaves as if she had a concave probability weighting function. This finding suggests that personal equilibrium in combination with loss aversion provides a mechanism for the formation of a concave probability weighting function. In unreported results, we show that this result can be extended directly to a multi-period setting if personal equilibria are achieved in each step of the backward induction. An open question for future research is to seek a mechanism for the formation of nonconcave or S-shaped probability weighting function in the context of personal equilibrium. One reasonable conjecture to generalize the results is that the UPE is unique and has the rank-dependent utility form if the choice set is connected and convex. While this general analysis is beyond the scope of the current study, it seems to be a very valuable research avenue and can potentially shed light on certain new aspects in applications of KR as they may rely on some form of nonconvexities.5 Empirically, UPE and CPE can be used to strengthen the explanatory power of loss aversion on the equity premium puzzle. Mehra and Prescott (1985) initiated this puzzle by arguing that the observed historical equity returns were too high, implying implausibly high risk-aversion coefficients employed in the asset allocation to achieve the observed 50–50 split between stocks and bonds. Benartzi and Thaler (1995) show that the observed equity premium is consistent with a moderate degree of loss aversion for an investment horizon of approximately 1 year. Their study assumes the reference point as the status quo, i.e., it uses zero capital gain as the reference level. Our estimates for personal equilibria show that α U achieves 0.5 (50–50 split between stocks and bonds) with a horizon of approximate 5 months while α C achieves 0.5 with a horizon slightly longer than 7 years. This result suggests that the observed asset allocation can be rationalized with personal equilibria for a wide range of investment horizons.6 Further examination of the empirical relevance of the concave weighting function derived from personal equilibria presents a promising avenue for future research.