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Mental accounts with horizon and asymmetry preferences

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  • Hübner, Georges
  • Lejeune, Thomas

Abstract

This paper extends mental accounting theory with an investment horizon and asymmetric trade-off between extreme gains and losses. This horizon-asymmetry mental accounting (HAMA) framework widens the spectrum of investors’ optimal portfolio choices considerably. Risk aversion, implied from the mean-variance portfolio theory, and the bond-to-stock ratio decline with the investment horizon. HAMA investors with a large gain–loss asymmetry trade-off are more concerned about skewness and kurtosis rather than variance. To apply the model to United States stock data, we develop a parsimonious semi-parametric version of HAMA that relies on the moments of return distributions. The analysis of optimal portfolios shows that investors who care significantly about upside potential hold asymmetric, leptokurtic, and less diversified allocations.

Suggested Citation

  • Hübner, Georges & Lejeune, Thomas, 2021. "Mental accounts with horizon and asymmetry preferences," Economic Modelling, Elsevier, vol. 103(C).
    • Handle: RePEc:eee:ecmode:v:103:y:2021:i:c:s0264999321002042
    DOI: 10.1016/j.econmod.2021.105615
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    More about this item

    Keywords

    Mental accounts; Portfolio choice; Horizon; Upside potential; Risk aversion;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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