Loss aversion refers to the fact that people are distinctively more sensitive to losses than to gains. Loss averse agents are very risk averse around the reference point and exhibit asymmetric responses to positive and negative income shocks. In an otherwise standard RBC model, I study loss aversion in both consumption alone and consumption-and-leisure together. My results indicate that how los...

In this paper, we develop a dynamic investment model maximizing the expected “utility” of excess return relative to a benchmark portfolio. Following the standard setting of continuous time framework for the securities market developed by Merton (1971) and others, we obtain an explicit formula for the optimal portfolio policy for a utility function ofHyperbolic Absolute Risk Aversion (HARA). Unl...

Measuring risk aversion is sensitive to assumptions about the wealth in subjects’ utility functions. Data from the same subjects in lowand high-stake lottery decisions allow estimating the wealth in a pre-specified oneparameter utility function simultaneously with risk aversion. This paper first shows how wealth estimates can be identified assuming constant relative risk aversion (CRRA). Using ...

This note shows that Machina's (1982) assumption that preferences over lotteries are smooth has some economic implications. We show that Fr echet di erentiability implies that preferences represent second order risk aversion (as well as conditional second order risk aversion). This implies, among other things, that decision makers buy full insurance only at the absence of marginal loading. We a...

All HARA-utility investors with the same exponent invest in a single risky fund and the risk-free asset. In a continuous time-model stock proportions are proportional to the inverse local relative risk aversion of the investor (1/γ-rule). This paper analyses the conditions under which the optimal buy and hold-portfolio of a HARA-investor can be approximated by the optimal portfolio of an invest...

An investor with constant relative risk aversion trades a safe and several risky assets with constant investment opportunities. For a small fixed transaction cost, levied on each trade regardless of its size, we explicitly determine the leading-order corrections to the frictionless value function and optimal policy.

Relying on a Constant Relative Risk Aversion utility function, we use panel data for Argentina to compute risk-adjusted income and poverty measures and to analyze their determinants. Taking risk into account increases poverty. The regression analysis suggests that many household characteristics are correlated not only with the average income of the household over time, but also with income vari...

The decision to transfer or share an insurable risk is critical for the maker’s economy. This paper deals with this decision, starting definition of a function that represents difference between expected utility insuring, without deductibles, and not insuring. Considering constant relative aversion (CRRA) function, we provide pattern potential policyholders as their wealth level. obtained rule ...