Asset return and wealth dynamics with reference dependent preferences and heterogeneous beliefs

We study a model of a financial market populated with heterogenous agents whose preferences exhibit dependence on some reference level of wealth. Investment decisions of the agents are myopic and are based upon the demand for the risky asset derived from an S-shaped utility maximization. The specific demand form allows to model both heterogeneity of the system relative to the reference points of the agents and heterogeneity with respect to their beliefs about the future asset return. We analyze the impact of the former layer of heterogeneity on the asset return and wealth dynamics.