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Portfolio choice with narrow framing and loss aversion: a simplified approach

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  • Andrew Grant
  • Oh Kang Kwon
  • Stephen Satchell

Abstract

This paper considers portfolio construction issues for a ‘mental accountant’, who exhibits an S-shaped utility function with loss aversion and narrowly-frames their asset allocation decision. We argue that the presence of narrow framing does not circumvent the existence of a budget constraint, and explicitly incorporate this into the investor's portfolio selection problem. The assumption of narrow framing allows us to derive relatively simple expressions for the mental accountant's optimal asset allocation decision. Our findings indicate that the mental accountant operates similarly to a high-conviction investor, leading to a time-series momentum approach to investment.

Suggested Citation

  • Andrew Grant & Oh Kang Kwon & Stephen Satchell, 2025. "Portfolio choice with narrow framing and loss aversion: a simplified approach," The European Journal of Finance, Taylor & Francis Journals, vol. 31(4), pages 451-476, March.
    • Handle: RePEc:taf:eurjfi:v:31:y:2025:i:4:p:451-476
    DOI: 10.1080/1351847X.2024.2388776
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