On Portfolio Choice with Savoring and Disappointment

We revisit the model proposed by Gollier and Muermann [Gollier C, Muermann A (2010) Optimal choice and beliefs with ex ante savoring and ex post disappointment. Management Sci. 56(8):1272–1284; hereafter, GM]. In the GM model, for a given lottery, agents form anticipated expected payoffs and the set of possible anticipations is assumed to be exogenously fixed. We propose sets of possible anticipations that are endogenously determined. This permits us to compare and evaluate in a consistent manner lotteries with different supports and to revisit the portfolio choice problem. We obtain new conclusions and interesting insights. Our extended model can rationalize a variety of empirically observed puzzles such as a positive demand for assets with negative expected returns, preference for skewed returns, and underdiversification of portfolios.

This paper was accepted by Rakesh Sarin, decision analysis.