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Loss-averse preferences and portfolio choices: An extension

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  • Eeckhoudt, Louis
  • Fiori, Anna Maria
  • Rosazza Gianin, Emanuela

Abstract

In this paper we generalise existing models of loss-averse preferences. This extension clarifies the impact of stochastic changes in risk on the optimal degree of risk taking. Our more general model highlights an intuitive link between the literature on loss-averse behaviours and the notions of prudence and temperance recently introduced in the literature. We also stress the link between our approach and the use of VaR and CVaR as risk measures.

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  • Eeckhoudt, Louis & Fiori, Anna Maria & Rosazza Gianin, Emanuela, 2016. "Loss-averse preferences and portfolio choices: An extension," European Journal of Operational Research, Elsevier, vol. 249(1), pages 224-230.
    • Handle: RePEc:eee:ejores:v:249:y:2016:i:1:p:224-230
    DOI: 10.1016/j.ejor.2015.08.019
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    3. Dennis W. Jansen & Liqun Liu, 2022. "Portfolio choice in the model of expected utility with a safety-first component," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 45(1), pages 187-207, June.
    4. Inmaculada Rodríguez-Puerta & Alberto A. Álvarez-López, 2022. "A model for the optimal selection of lenders," Annals of Operations Research, Springer, vol. 313(2), pages 1269-1284, June.
    5. Borgonovo, E. & Cappelli, V. & Maccheroni, F. & Marinacci, M., 2018. "Risk analysis and decision theory: A bridge," European Journal of Operational Research, Elsevier, vol. 264(1), pages 280-293.
    6. Louis Eeckhoudt & Anna Maria Fiori & Emanuela Rosazza Gianin, 2018. "Risk Aversion, Loss Aversion, and the Demand for Insurance," Risks, MDPI, vol. 6(2), pages 1-19, May.
    7. Liudong Chen & Bolun Xu, 2024. "Prudent Price-Responsive Demands," Papers 2405.16356, arXiv.org.
    8. Fang, Yi & Post, Thierry, 2017. "Higher-degree stochastic dominance optimality and efficiency," European Journal of Operational Research, Elsevier, vol. 261(3), pages 984-993.
    9. Wang, Jianli & Liu, Liqun & Neilson, William S., 2020. "The participation puzzle with reference-dependent expected utility preferences," Insurance: Mathematics and Economics, Elsevier, vol. 93(C), pages 278-287.
    10. Claudio A. Bonilla & Marcos Vergara, 2021. "Risk aversion, downside risk aversion, and the transition to entrepreneurship," Theory and Decision, Springer, vol. 91(1), pages 123-133, July.
    11. Bonilla, Claudio A. & Fica, Diego, 2022. "Loss aversion and risky entrepreneurship," Finance Research Letters, Elsevier, vol. 48(C).
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    14. Claudio A. Bonilla & Marcos Vergara & Richard Watt, 2022. "Changes in risk and entrepreneurship," Risk Management, Palgrave Macmillan, vol. 24(4), pages 367-385, December.

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