Prospect theory, constant relative risk aversion, and the investment horizon.
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ABSTRACT:
SUBMITTER: Levy H
PROVIDER: S-EPMC8016345 | biostudies-literature | 2021
REPOSITORIES: biostudies-literature
Publications
Prospect theory, constant relative risk aversion, and the investment horizon.
PloS one 20210401 4
Prospect Theory (PT) and Constant-Relative-Risk-Aversion (CRRA) preferences have clear-cut and very different implications for the optimal asset allocation between a riskless asset and a risky stock as a function of the investment horizon. While CRRA implies that the optimal allocation is independent of the horizon, we show that PT implies a dramatic and discontinuous "jump" in the optimal allocation as the horizon increases. We experimentally test these predictions at the individual level. We f ...[more]
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