Failing to Foresee the Updating of the Reference Point Leads to Time-Inconsistent Investment

• 成果类型: Article
• 署名作者: Strub, Moris S.; Li, Duan
• 署名单位: Southern University of Science & Technology; City University of Hong Kong
• 刊物名称: OPERATIONS RESEARCH
• ISSN/ISSBN: 0030-364X
• DOI: 10.1287/opre.2019.1872
• 发表日期: 2020
• 页码: 199-213
• 关键词: reference-dependent preferences; reference point updating; time-inconsistency; stochastic control; PORTFOLIO SELECTION; prediction bias

摘要

The current literature on behavioral portfolio optimization with reference point updating assumes that the decision maker foresees how the reference point will evolve and thus solves a time-consistent problem formulation. Empirical findings, however, suggest that decision makers often fail to foresee the updating of the reference point and consequently make time-inconsistent decisions. We analyze and compare the optimal investment strategies for a discrete time behavioral portfolio optimization problem with loss-aversion and time-varying reference points under both the time-consistent and time-inconsistent framework and for different updating rules for the reference point. There is only one framework predicting realistic investment behavior: the decision maker fails to foresee the updating of the reference point and thus faces a time-inconsistent problem, solves for a dynamically optimal strategy, and updates the reference point in a nonrecursive manner.