How Endogenization of the Reference Point Affects Loss Aversion: A Study of Portfolio Selection

References

• Abdellaoui M, Bleichrodt H, Paraschiv C (2007) Loss aversion under prospect theory: A parameter-free measurement. Management Sci. 53(10):1659–1674.Link, Google Scholar
• Abeler J, Falk A, Goette L, Huffman D (2011) Reference points and effort provision. Amer. Econom. Rev. 101(2):470–492.Crossref, Google Scholar
• Anagol S, Balasubramaniam V, Ramadorai T (2018) Endowment effects in the field: Evidence from India’s IPO lotteries. Rev. Econom. Stud. 85(4):1971–2004.Crossref, Google Scholar
• Andries M (2019) Risk pricing under gain-loss asymmetry. Preprint, posted August 12, https://dx.doi.org/10.2139/ssrn.3433953.Google Scholar
• Ang A, Bekaert G, Liu J (2005) Why stocks may disappoint. J. Financial Econom. 76(3):471–508.Crossref, Google Scholar
• Ang A, Hodrick RJ, Xing Y, Zhang X (2006) The cross-section of volatility and expected returns. J. Finance 61(1):259–299.Crossref, Google Scholar
• Arkes HR, Hirshleifer D, Jiang D, Lim S (2008) Reference point adaptation: Tests in the domain of security trading. Organ. Behav. Human Decision Processes 105(1):67–81.Crossref, Google Scholar
• Arkes HR, Hirshleifer D, Jiang D, Lim SS (2010) A cross-cultural study of reference point adaptation: Evidence from China, Korea, and the U.S. Organ. Behav. Human Decision Processes 112(2):99–111.Crossref, Google Scholar
• Barberis N, Huang M (2001) Mental accounting, loss aversion, and individual stock returns. J. Finance 56(4):1247–1292.Crossref, Google Scholar
• Barberis N, Thaler R (2003) A survey of behavioral finance. Constantinides G, Harris M, Stulz RM, eds. Handbook of the Economics of Finance: Financial Markets and Asset Pricing, vol. 1 (North-Holland, Amsterdam), 1053–1128.Google Scholar
• Barberis N, Xiong W (2009) What drives the disposition effect? An analysis of a long-standing preference-based explanation. J. Finance 64(2):751–784.Crossref, Google Scholar
• Baucells M, Sarin RK (2010) Predicting utility under satiation and habit formation. Management Sci. 56(2):286–301.Link, Google Scholar
• Bell DE (1982) Regret in decision making under uncertainty. Oper. Res. 30(5):961–981.Link, Google Scholar
• Benartzi S, Thaler RH (1995) Myopic loss aversion and the equity premium puzzle. Quart. J. Econom. 110(1):73–92.Crossref, Google Scholar
• Berkelaar A, Kouwenberg R, Post T (2004) Optimal portfolio choice under loss aversion. Rev. Econom. Statist. 86(4):973–987.Crossref, Google Scholar
• Bernard C, Ghossoub M (2010) Static portfolio choice under cumulative prospect theory. Math. Financial Econom. 2(4):277–306.Crossref, Google Scholar
• Black F, Scholes M (1973) The pricing of options and corporate liabilities. J. Political Econom. 81(3):637–654.Crossref, Google Scholar
• Bordalo P, Gennaioli N, Shleifer A (2012) Salience theory of choice under risk. Quart. J. Econom. 127(3):1243–1285.Crossref, Google Scholar
• Brown AL, Imai T, Vieider FM, Camerer CF (2021) Meta-analysis of empirical estimates of loss-aversion. Accessed June 1, 2022, https://osf.io/preprints/metaarxiv/hnefr.Google Scholar
• Brunnermeier MK, Parker JA (2005) Optimal expectations. Amer. Econom. Rev. 95(4):1092–1118.Crossref, Google Scholar
• Brunnermeier MK, Gollier C, Parker JA (2007) Optimal beliefs, asset prices, and the preference for skewed returns. Amer. Econom. Rev. 97(2):159–165.Crossref, Google Scholar
• Calvet LE, Campbell JY, Sodini P (2009) Fight or flight? Portfolio rebalancing by individual investors. Quart. J. Econom. 124(1):301–348.Crossref, Google Scholar
• Camerer C, Babcock L, Loewenstein G, Thaler R (1997) Labor supply of New York City cabdrivers: One day at a time. Quart. J. Econom. 112(2):407–441.Crossref, Google Scholar
• Carbajal JC, Ely JC (2016) A model of price discrimination under loss aversion and state-contingent reference points. Theoret. Econom. 11(2):455–485.Crossref, Google Scholar
• Cox JC, Ross SA, Rubinstein M (1979) Option pricing: A simplified approach. J. Financial Econom. 7(3):229–263.Crossref, Google Scholar
• Da Costa NJ, Goulart M, Cupertino C, Macedo JJ, Da Silva S (2013) The disposition effect and investor experience. J. Banking Finance 37(5):1669–1675.Crossref, Google Scholar
• De Giorgi EG, Post T (2011) Loss aversion with a state-dependent reference point. Management Sci. 57(6):1094–1110.Link, Google Scholar
• Dhar R, Zhu N (2006) Up close and personal: Investor sophistication and the disposition effect. Management Sci. 52(5):726–740.Link, Google Scholar
• Edwards KD (1996) Prospect theory: A literature review. Internat. Rev. Financial Anal. 5(1):19–38.Crossref, Google Scholar
• Ericson MKM, Fuster A (2011) Expectations as endowments: Evidence on reference-dependent preferences from exchange and valuation experiments. Quart. J. Econom. 126(4):1879–1907.Crossref, Google Scholar
• Feng L, Seasholes MS (2005) Do investor sophistication and trading experience eliminate behavioral biases in financial markets? Rev. Finance 9(3):305–351.Crossref, Google Scholar
• Gneezy U, Goette L, Sprenger C, Zimmermann F (2017) The limits of expectations-based reference dependence. J. Eur. Econom. Assoc. 15(4):861–876.Crossref, Google Scholar
• Gomes FJ (2005) Portfolio choice and trading volume with loss-averse investors. J. Bus. 78(2):675–706.Crossref, Google Scholar
• Greenwood R, Nagel S (2009) Inexperienced investors and bubbles. J. Financial Econom. 93(2):239–258.Crossref, Google Scholar
• Guasoni P, Meireles-Rodrigues A (2020a) Reference dependence and market participation. Math. Oper. Res. 45(1):129–156.Link, Google Scholar
• Guasoni P, Meireles-Rodrigues A (2020b) Reference dependence: Endogenous anchors and life-cycle investing. Preprint, submitted, https://dx.doi.org/10.2139/ssrn.3658342.Google Scholar
• Gul F (1991) A theory of disappointment aversion. Econometrica 59(3):667–686.Crossref, Google Scholar
• He XD, Yang L (2019) Realization utility with adaptive reference points. Math. Finance 29(2):409–447.Crossref, Google Scholar
• He XD, Zhou XY (2011a) Portfolio choice under cumulative prospect theory: An analytical treatment. Management Sci. 57(2):315–331.Link, Google Scholar
• He XD, Zhou XY (2011b) Portfolio choice via quantiles. Math. Finance 21(2):203–231.Crossref, Google Scholar
• He XD, Zhou XY (2014) Myopic loss aversion, reference point, and money illusion. Quant. Finance 14(9):1541–1554.Crossref, Google Scholar
• He XD, Zhou XY (2016) Hope, fear, and aspirations. Math. Finance 26(1):3–50.Crossref, Google Scholar
• He XD, Kouwenberg R, Zhou XY (2017) Rank-dependent utility and risk taking in complete markets. SIAM J. Financial Math. 8(1):214–239.Crossref, Google Scholar
• He XD, Strub MS, Zariphopoulou T (2021) Forward rank-dependent performance criteria: Time-consistent investment under probability distortion. Math. Finance 31(2):683–721.Crossref, Google Scholar
• Heffetz O, List JA (2014) Is the endowment effect an expectations effect? J. Eur. Econom. Assoc. 12(5):1396–1422.Crossref, Google Scholar
• Jin H, Zhou XY (2008) Behavioral portfolio selection in continuous time. Math. Finance 18(3):385–426.Crossref, Google Scholar
• Kahneman D, Tversky A (1979) Prospect theory: An analysis of decision under risk. Econometrica 47(2):263–291.Crossref, Google Scholar
• Kahneman D, Tversky A (2000) Choices, Values, and Frames (Cambridge University Press, New York).Google Scholar
• Kőszegi B, Rabin M (2006) A model of reference-dependent preferences. Quart. J. Econom. 121(4):1133–1165.Crossref, Google Scholar
• Kőszegi B, Rabin M (2007) Reference-dependent risk attitudes. Amer. Econom. Rev. 97(4):1047–1073.Crossref, Google Scholar
• Kőszegi B, Rabin M (2009) Reference-dependent consumption plans. Amer. Econom. Rev. 99(3):909–936.Crossref, Google Scholar
• Lim SS (2006) Do investors integrate losses and segregate gains? Mental accounting and investor trading decisions. J. Bus. 79(5):2539–2573.Crossref, Google Scholar
• List JA (2003) Does market experience eliminate market anomalies? Quart. J. Econom. 118(1):41–71.Crossref, Google Scholar
• List JA (2004) Neoclassical theory vs. prospect theory: Evidence from the marketplace. Econometrica 72(2):615–625.Crossref, Google Scholar
• Loomes G, Sugden R (1982) Regret theory: An alternative theory of rational choice under uncertainty. Econom. J. (London) 92(368):805–824.Google Scholar
• Masatlioglu Y, Raymond C (2016) A behavioral analysis of stochastic reference dependence. Amer. Econom. Rev. 106(9):2760–2782.Crossref, Google Scholar
• Mehra R, Prescott EC (1985) The equity premium: A puzzle. J. Monetary Econom. 15(2):145–161.Crossref, Google Scholar
• Meng J, Weng X (2018) Can prospect theory explain the disposition effect? A new perspective on reference points. Management Sci. 64(7):3331–3351.Link, Google Scholar
• O’Donoghue T, Sprenger C (2018) Reference-dependent preferences. Bernheim BD, DellaVigna S, Laibson D, eds. Handbook of Behavioral Economics-Foundations and Applications 1, vol. 1 (North-Holland, Amsterdam), 1–77.Google Scholar
• Pagel M (2016) Expectations-based reference-dependent preferences and asset pricing. J. Eur. Econom. Assoc. 14(2):468–514.Crossref, Google Scholar
• Pagel M (2017) Expectations-based reference-dependent life-cycle consumption. Rev. Econom. Stud. 84(2):885–934.Google Scholar
• Pagel M (2018) A news-utility theory for inattention and delegation in portfolio choice. Econometrica 86(2):491–522.Crossref, Google Scholar
• Pagel M (2019) Prospective gain-loss utility: Ordered vs. separated comparison. J. Econom. Behav. Organ. 168:62–75.Crossref, Google Scholar
• Pirvu T, Schulze K (2012) Multi-stock portfolio optimization under prospect theory. Math. Financial Econom. 6(4):337–362.Crossref, Google Scholar
• Shi Y, Cui X, Li D (2015a) Discrete-time behavioral portfolio selection under cumulative prospect theory. J. Econom. Dynam. Control 61:283–302.Crossref, Google Scholar
• Shi Y, Cui X, Yao J, Li D (2015b) Dynamic trading with reference point adaptation and loss aversion. Oper. Res. 63(4):789–806.Link, Google Scholar
• Strub MS, Li D (2020) Failing to foresee the updating of the reference point leads to time-inconsistent investment. Oper. Res. 68(1):199–213.Link, Google Scholar
• Sugden R (2003) Reference-dependent subjective expected utility. J. Econom. Theory 111(2):172–191.Crossref, Google Scholar
• Thaler R (1985) Mental accounting and consumer choice. Marketing Sci. 4(3):199–214.Link, Google Scholar
• Thaler RH, Johnson EJ (1990) Gambling with the house money and trying to break even: The effects of prior outcomes on risky choice. Management Sci. 36(6):643–660.Link, Google Scholar
• van Bilsen S, Laeven RJ, Nijman TE (2020) Consumption and portfolio choice under loss aversion and endogenous updating of the reference level. Management Sci. 66(9):3927–3955.Link, Google Scholar
• Xia J, Zhou XY (2016) Arrow-Debreu equilibria for rank-dependent utilities. Math. Finance 26(3):558–588.Crossref, Google Scholar
• Xu ZQ (2016) A note on the quantile formulation. Math. Finance 26:589–601.Crossref, Google Scholar