We study the asset allocation of an investor with prospect theory (PT) preferences. First, we solve analytically the two-asset problem of the PT investor for one risk-free and one risky asset and find that loss aversion and the reference return affect differently less ambitious investors and...

Loss aversion has been shown to be an important driver of people’s investment decisions. Encouraged by regulators, financial institutions are in search of ways to incorporate clients’ loss aversion in their risk classifications. The most critical obstacle appears to be the lack of a valid...

The maximum diversification portfolio as defined by Choueifaty (2011) depends on the vector of asset volatilities and the inverse of the covariance matrix of the asset return. In practice, these two quantities need to be replaced by their sample statistics. The estimation error associated with...

The maximum diversification has been shown in the literature to depend on the vector of asset volatilities and the inverse of the covariance matrix of the asset return covariance matrix. In practice, these two quantities need to be replaced by their sample statistics. The estimation error...

Individual investors trade excessively, sell winners too soon, and overweight stocks with lottery features and low expected returns. This paper proposes and models a financial innovation, called stock loan lotteries, that improves individual investor performance. An individual investor signs a...

Assuming the loss aversion framework of Tversky and Kahneman (1992), stochastic investment and labour income processes, and a path-dependent fund target, we show that the optimal investment strategy for defined contribution pension plan members is a target-driven ‘threshold' strategy, whereby...

Several scholars analyze the relationship between individuals’ willingness to take risks and financial investment decisions. We add to this literature in using data from the German Socio-Economic Panel which allow ruling out that investments in risky assets itself impact on risk attitudes. We...

I introduce a method of portfolio selection based on the idea that investment risk is not having enough wealth when you need it. Not having enough wealth translates into a required return. When you need wealth translates into an investment horizon. These two ingredients, when combined with...

Story-telling helps to define the human experience. Do people also use narratives to make sense of, and to act on, financial information? Three studies demonstrate that people's investment predictions and choices instead are by narrative thinking. Whereas neoclassical financial theory maintains...

An analysis of the Survey of Consumer Finance shows that wealthy investors have a higher return on their stocks than their poorer counterparts. Three key empirical facts emerge: (i) wealthy investors employ more productive search efforts, (ii) financial risk bearing and search efforts are...