Description
I study some comparative statics implications of disappointment-averse preferences for optimal portfolios. Specifically, I find that risk-averse disappointment-averse investors increase investment in a risky asset as a result of a monotone likelihood ratio improvement in the asset’s distribution, a subset of First Order

I study some comparative statics implications of disappointment-averse preferences for optimal portfolios. Specifically, I find that risk-averse disappointment-averse investors increase investment in a risky asset as a result of a monotone likelihood ratio improvement in the asset’s distribution, a subset of First Order Stochastic improvements. This gives a testable implication between the disappointment aversion model, and alternatives, including expected utility. I also discuss previously noted implications for disappointment aversion in helping explain the equity premium puzzle.
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    Title
    • Testable Implications of Disappointment Aversion
    Date Created
    2024-05
    Resource Type
  • Text
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