Dynamic spending and portfolio decisions with a soft social norm

We explore the implications of a preference ordering for an investor-consumer with strong keeping consumption above exogenous social norm, but who is willing to tolerate occasional dips below it. do this by splicing two CRRA orderings, one high curvature norm and other low at or find formulation appealing many endowment funds sovereign wealth funds, including Norwegian Government Pension Fund Global, which inspired our research. derive analytical solution, we use describe key properties policy functions portfolio allocation. that annual spending should not only be significantly lower than expected financial return, mostly also procyclical. In particular, losses should, as rule, followed larger proportional cuts, except when some smoothing needed keep from falling too far norm. Yet, very levels, kept particularly in order build sufficient raise Financial risk taking modest procyclical, so investor sometimes may want “buy top” “sell bottom.” Many these features are shared habit-formation models bound consumption. However, specification more flexible thus easily adaptable actual fund management. The nonlinearity present challenges regarding delegation professional managers. simpler rules thumb constant slowly moving equity share consumption-wealth ratio can reach almost same discounted utility. Nevertheless, levels will then look different utility Epstein–Zin preferences much lower.