Benchmarks in Aggregate Household Portfolios

Reference–dependent preference models assume that agents derive utility fromdeviations of consumption from benchmark levels, rather than from consumptionlevels. These references can be either backward-looking (as explicit in the Habit literature) or forward-looking (as implicitly suggested by Prospect Theory). For bothcases, we specify and estimate a fully structural multi-variate Brownian system inoptimal consumption, portfolio and wealth using aggregate household financial andreal estate wealth data. Our results reveal that references are (i) strongly relevant,(ii) state-dependent, and (iii) that the data is more consistent with the backward-than the forward-looking reference model.