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13
Household finance. An emerging field
, 2012
"... Household finance- the normative and positive study of how households use financial markets to achieve their objectives- has gained a lot of attention over the past decade and has become a field with its own identity, style and agenda. In this chapter we review its evolution and most recent developm ..."
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Cited by 12 (2 self)
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Household finance- the normative and positive study of how households use financial markets to achieve their objectives- has gained a lot of attention over the past decade and has become a field with its own identity, style and agenda. In this chapter we review its evolution and most recent developments.
Regret and Regulation
, 2011
"... We analyze the welfare e¤ect of governmental regulation for individuals who consider anticipated regret in their decision making process. While governmental policies by directing choice distort individual decisions in the private market they can alleviate individuals’pain associated with the feeling ..."
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Cited by 1 (0 self)
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We analyze the welfare e¤ect of governmental regulation for individuals who consider anticipated regret in their decision making process. While governmental policies by directing choice distort individual decisions in the private market they can alleviate individuals’pain associated with the feeling of regret. We specify a general model to highlight this trade-o ¤ and investigate two policies more closely: tax deduction for non-insured losses and mandated investment guarantees in private retirement accounts. We derive conditions under which these policies are welfare increasing. Key Words regret; regulation; tax deduction; insurance demand; retirement saving; investment guarantee Regulation of competitive markets is typically justi…ed by ine ¢ ciencies arising from externalities or asymmetric information problems. A di¤erent line of reasoning argues that individuals make certain decisions that are not in their own best interests, e.g., caused by problems of self-control or incorrect beliefs. This gives rise to the role of the government as a paternalist. By correcting these
Figure a: Trajectories of Simulated Returns On Assets
, 2007
"... Firstly, I would like to thank the Almighty for His grace in enabling me to complete this dissertation. I would like to acknowledge the emotional support provided by my imme ..."
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Firstly, I would like to thank the Almighty for His grace in enabling me to complete this dissertation. I would like to acknowledge the emotional support provided by my imme
Regret, Pride, and the Disposition Effect
, 2006
"... We develop a dynamic portfolio choice model which incorporates anticipated regret and pride in individual’s preferences and show that those preferences can cause investors to sell winning stocks and hold on to losing stocks; that is, anticipating regret and pride can help explain the disposition eff ..."
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We develop a dynamic portfolio choice model which incorporates anticipated regret and pride in individual’s preferences and show that those preferences can cause investors to sell winning stocks and hold on to losing stocks; that is, anticipating regret and pride can help explain the disposition effect.
From Aggregate Betting Data to Individual Risk Preferences∗
, 2012
"... As a textbook model of contingent markets, horse races are an attractive environ-ment to study the attitudes towards risk of bettors. We innovate on the literature by explicitly considering heterogeneous bettors and allowing for very general risk prefer-ences, including non-expected utility. We buil ..."
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As a textbook model of contingent markets, horse races are an attractive environ-ment to study the attitudes towards risk of bettors. We innovate on the literature by explicitly considering heterogeneous bettors and allowing for very general risk prefer-ences, including non-expected utility. We build on a standard single-crossing condition on preferences to derive testable implications; and we show how parimutuel data allow us to uniquely identify the distribution of preferences among the population of bettors. We then estimate the model on data from US races. Within the expected utility class, the most usual specifications (CARA and CRRA) fit the data very badly. Our results show evidence for both heterogeneity and nonlinear probability weighting. ∗This paper was first circulated and presented under the title ”What you are is what you bet: eliciting risk attitudes from horse races. ” We thank many seminar audiences for their comments. We are especially grateful to Jeffrey Racine for advice on nonparametric and semiparametric approaches, and to Simon Wood for help with his R package mgcv. Bernard Salanie ́ thanks the Georges Meyer endowment for its support during a leave at the Toulouse School of Economics. Pierre Andre Chiappori gratefully acknowledges financial support from NSF (Award 1124277.)
Regret Theory and Equilibrium Asset Prices
"... Regret theory is a behavioral approach to decision making under uncertainty. In this paper we assume that there are two representative investors in a frictionless market, a representative active investor who selects his optimal portfolio based on regret theory and a representative passive investor ..."
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Regret theory is a behavioral approach to decision making under uncertainty. In this paper we assume that there are two representative investors in a frictionless market, a representative active investor who selects his optimal portfolio based on regret theory and a representative passive investor who invests only in the benchmark portfolio. In a partial equilibrium setting, the objective of the representative active investor is modeled as minimization of the regret about final wealth relative to the benchmark portfolio. In equilibrium this optimal strategy gives rise to a behavioral asset priciting model. We show that the market beta and the benchmark beta that is related to the investor's regret are the determinants of equilibrium asset prices. We also extend our model to a market with multibenchmark portfolios. Empirical tests using stock price data from Shanghai Stock Exchange show strong support to the asset pricing model based on regret theory.
Envy and Portfolio Allocation in Defined Contribution Pension Plans
, 2006
"... We examine the effect of envy on the portfolio allocation of a worker in a defined contribution (DC) pension plan. For instance, if a worker’s DC plan performs better than his co-worker’s, he may gloat; on the other hand, if his DC plan performs worse, he may feel envy. We model such anticipated env ..."
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We examine the effect of envy on the portfolio allocation of a worker in a defined contribution (DC) pension plan. For instance, if a worker’s DC plan performs better than his co-worker’s, he may gloat; on the other hand, if his DC plan performs worse, he may feel envy. We model such anticipated envy when a worker makes his portfolio allocation. In equilibrium, workers will mimic their co-worker’s allocation to eliminate the disutility from envy. In some instances, this allocation will result in a riskier portfolio than that of a worker who does not exhibit envy.
Regret, Procrastination, and Defaults in Defined Contribution Pension Plans
, 2008
"... A dynamic portfolio choice setting is examined in which de…ned contribution pension plan participants are given a default asset allocation and have the opportunity to change the allocation. We investigate investors with preferences that include regret; if the new allocation performs worse than the d ..."
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A dynamic portfolio choice setting is examined in which de…ned contribution pension plan participants are given a default asset allocation and have the opportunity to change the allocation. We investigate investors with preferences that include regret; if the new allocation performs worse than the default allocation, the investor feels regret, and if the new allocation performs better, he rejoices. We show that anticipated regret and rejoicing do not cause participants to procrastinate in making asset allocation changes. That is, anticipated regret and rejoicing actually induces investors to take action and deviate from the status quo of the default allocation. Investors who regret and rejoice are more likely to make allocation changes than those who do not have such behavioral attributes.
in Defined Contribution Schemes ¦
, 2003
"... We model how asset allocation decisions in a defined contribution (DC) pension plan might vary with participants ’ attitudes about risk and regret. We show that anticipated disutility from regret can have a potent effect on investment choices. Compared to a risk-averse investor, the investor who tak ..."
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We model how asset allocation decisions in a defined contribution (DC) pension plan might vary with participants ’ attitudes about risk and regret. We show that anticipated disutility from regret can have a potent effect on investment choices. Compared to a risk-averse investor, the investor who takes regret into account will hold more stock when the equity premium is low but less stock when the equity premium is high. We also assess how regret can influence a DC plan participant’s view of rate-of-return guarantees, as measured by his willingness-to-pay. We find that regret increases the regret-averse investor’s willingness to pay for a guarantee when the portfolio is relatively risky but decreases it when the portfolio is relatively safe.
From Aggregate Betting Data to Individual Risk Preferences∗
, 2012
"... As a textbook model of contingent markets, horse races are an attractive environ-ment to study the attitudes towards risk of bettors. We innovate on the literature by explicitly considering heterogeneous bettors and allowing for very general risk prefer-ences, including non-expected utility. We buil ..."
Abstract
- Add to MetaCart
As a textbook model of contingent markets, horse races are an attractive environ-ment to study the attitudes towards risk of bettors. We innovate on the literature by explicitly considering heterogeneous bettors and allowing for very general risk prefer-ences, including non-expected utility. We build on a standard single-crossing condition on preferences to derive testable implications; and we show how parimutuel data allow us to uniquely identify the distribution of preferences among the population of bettors. We then estimate the model on data from US races. Within the expected utility class, the most usual specifications (CARA and CRRA) fit the data very badly. Our results show evidence for both heterogeneity and nonlinear probability weighting. ∗This paper was first circulated and presented under the title ”What you are is what you bet: eliciting risk attitudes from horse races. ” We thank many seminar audiences for their comments. We are especially grateful to Jeffrey Racine for advice on nonparametric and semiparametric approaches, and to Simon Wood for help with his R package mgcv. Bernard Salanie ́ thanks the Georges Meyer endowment for its support during a leave at the Toulouse School of Economics. Pierre Andre Chiappori gratefully acknowledges financial support from NSF (Award 1124277.)
