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Investment decisions with loss aversion over relative consumption

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  • Gebhardt, Georg

Abstract

We study an exchange economy in which investors are loss averse over relative consumption, that is, they suffer a utility loss if they consume less than members of their reference group. As a consequence there is an incentive to hold the same portfolio of risky assets as the reference group. Thus, risk premia can be supported in equilibrium that diverge from the risk premia obtained without loss aversion over relative consumption. This effect may be used to explain time-varying risk premia that are empirically observed for many assets.

Suggested Citation

  • Gebhardt, Georg, 2011. "Investment decisions with loss aversion over relative consumption," Journal of Economic Behavior & Organization, Elsevier, vol. 80(1), pages 68-73.
    • Handle: RePEc:eee:jeborg:v:80:y:2011:i:1:p:68-73
    DOI: 10.1016/j.jebo.2011.02.011
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    References listed on IDEAS

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    Cited by:

    1. Amrei Lahno & Marta Serra-Garcia, 2015. "Peer effects in risk taking: Envy or conformity?," Journal of Risk and Uncertainty, Springer, vol. 50(1), pages 73-95, February.
    2. Weining Niu & Qingduo Zeng, 2017. "Security issuance and price impact under loss aversion," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(02n03), pages 1-9, June.
    3. Lahno, Amrei M., 2014. "Social anchor effects in decision-making under ambiguity," Discussion Papers in Economics 20960, University of Munich, Department of Economics.

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    More about this item

    Keywords

    Loss aversion; Relative consumption;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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