Testable Implications of Disappointment Aversion

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.