Shortfall aversion

Shortfall Aversion ∗

Shortfall aversion reflects the higher utility loss of a spending cut from a reference point than the utility gain from a similar spending increase, in the spirit of Prospect Theory’s loss aversion. This paper posits a model of utility of spending scaled by a function of past peak spending, called target spending. The discontinuity of the marginal utility at the target spending corresponds to s...

Minimizing Shortfall

Minimizing the Lifetime Shortfall or Shortfall at Death

We find the optimal investment strategy for an individual who seeks to minimize one of four objectives: (1) the probability that his wealth reaches a specified ruin level before death, (2) the probability that his wealth reaches that level at death, (3) the expectation of how low his wealth drops below a specified level before death, and (4) the expectation of how low his wealth drops below a s...

Expected Shortfall and Beyond

Abstract. Financial institutions have to allocate so-called economic capital in order to guarantee solvency to their clients and counter parties. Mathematically speaking, any methodology of allocating capital is a risk measure, i.e. a function mapping random variables to the real numbers. Nowadays value-atrisk, which is defined as a fixed level quantile of the random variable under consideratio...

Shortfall Minimizing Portfolios

Many institutional and private investors seek for a long run excess return relative to a reference strategy (e.g. money market, bond index, etc.) which they want to attain under a minimal shortfall probability. In this article it is shown that even in the long run in order to attain a substantial excess return a high shortfall probability has to be accepted. In the model the prices of the asset...