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Comparative statics and portfolio choices under the phantom decision model

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  • Iwaki, Hideki
  • Osaki, Yusuke

Abstract

This study characterizes attitudes toward uncertainty in the phantom decision model introduced by Izhakian and Izhakian (2015) and conducts a comparative statics analysis to examine how changes in phantom uncertainty and phantom aversion affect portfolio choices. First, “phantom averse” and “more phantom-averse” are defined in a manner that differs from Izhakian and Izhakian (2015). Assuming that utility functions have realization forms, the above notions are characterized by the shapes of their reduction components. For the portfolio choice problem that consists of one safe asset and one phantom asset, we derive sufficient conditions under which changes in phantom uncertainty and phantom aversion monotonically decrease the investment in the phantom asset. Some familiar concepts in expected utility theory are extended to the framework of the phantom decision model.

Suggested Citation

  • Iwaki, Hideki & Osaki, Yusuke, 2017. "Comparative statics and portfolio choices under the phantom decision model," Journal of Banking & Finance, Elsevier, vol. 84(C), pages 1-8.
    • Handle: RePEc:eee:jbfina:v:84:y:2017:i:c:p:1-8
    DOI: 10.1016/j.jbankfin.2017.07.001
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    References listed on IDEAS

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    1. Hideki Iwaki & Yusuke Osaki, 2014. "The dual theory of the smooth ambiguity model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 56(2), pages 275-289, June.
    2. Yehuda Izhakian & Zur Izhakian, 2015. "Decision making in phantom spaces," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(1), pages 59-98, January.
    3. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
    4. Marciano Siniscalchi, 2009. "Vector Expected Utility and Attitudes Toward Variation," Econometrica, Econometric Society, vol. 77(3), pages 801-855, May.
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    6. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    7. Christian Gollier, 2011. "Portfolio Choices and Asset Prices: The Comparative Statics of Ambiguity Aversion," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(4), pages 1329-1344.
    8. Segal, Uzi & Spivak, Avia, 1990. "First order versus second order risk aversion," Journal of Economic Theory, Elsevier, vol. 51(1), pages 111-125, June.
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    10. Hadar, Josef & Seo, Tae Kun, 1990. "The Effects of Shifts in a Return Distribution on Optimal Portfolios," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 721-736, August.
    11. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
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    Cited by:

    1. 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.
    2. Octave Jokung & Sovan Mitra, 2019. "Asset Prices and Changes in Risk within a Bivariate Model," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 26(1), pages 47-60, March.
    3. Korotkov, Vladimir & Wu, Desheng, 2021. "Benchmarking project portfolios using optimality thresholds," Omega, Elsevier, vol. 99(C).

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    More about this item

    Keywords

    Comparative statics; Portfolio choice; Phantom aversion; Phantom decision model; Uncertainty;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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