Discrete-time financial planning models under loss-averse preferences

Research output: Contribution to JournalArticleAcademic


We consider a dynamic asset allocation problem formulated as a mean-shortfall model in discrete time. A characterization of the solution is derived analytically under general distributional assumptions for serially independent risky returns. The solution displays risk taking under shortfall, as well as a specific form of time diversification. Also, for a representative stock-return distribution, risk taking increases monotonically with the number of decision moments given a fixed horizon. This is related to the well-known casino effect arising in a downside-risk and expected return framework. As a robustness check, we provide results for a modified objective with a quadratic penalty on shortfall. An analytical solution for a single-stage setup is derived, and numerical results for the two-period model and time diversification are provided. © 2005 INFORMS.
Original languageEnglish
Pages (from-to)403-414
JournalOperations Research
Issue number3
Publication statusPublished - 2005


Dive into the research topics of 'Discrete-time financial planning models under loss-averse preferences'. Together they form a unique fingerprint.

Cite this