Shortfall Aversion
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Shortfall Aversion
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Author : Paolo Guasoni
language : en
Publisher:
Release Date : 2017
Shortfall Aversion written by Paolo Guasoni and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
Shortfall aversion reflects the higher utility loss of spending cuts from a reference than the utility gain from similar spending increases. Inspired by Prospect Theory's loss aversion and the peak-end rule, this paper posits a model of utility from spending scaled by past peak-spending. In contrast to traditional models, which call for spending rates proportional to wealth, the optimal policy in this model implies a constant spending rate equal to the historical peak when wealth is relatively large. The spending rate increases when wealth reaches a model-determined multiple of peak spending. In 1926-2015, shortfall-averse spending is smooth and typically increasing.
Shortfall Aversion
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Author : Paolo Guasoni
language : en
Publisher:
Release Date : 2014
Shortfall Aversion written by Paolo Guasoni and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with Loss aversion categories.
Shortfall aversion reflects the higher utility loss of a spending cut from a reference point than the utility gain from a similar spending increase, in the spirit of Prospect Theory's loss aversion. This paper posits a model of utility of spending scaled by a function of past peak spending, called target spending. The discontinuity of the marginal utility at the target spending corresponds to shortfall aversion. According to the closed-form solution of the associated spending-investment problem, (i) the spending rate is constant and equals the historical peak for relatively large values of wealth/target; and (ii) the spending rate increases (and the target with it) when that ratio reaches its model-determined upper bound. These features contrast with traditional Merton-style models which call for spending rates proportional to wealth. A simulation using the 1926-2012 realized returns suggests that spending of the very shortfall averse is typically increasing and very smooth.
Optimal Consumption And Life Insurance Under Shortfall Aversion And A Drawdown Constraint
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Author : Xun Li
language : en
Publisher:
Release Date : 2022
Optimal Consumption And Life Insurance Under Shortfall Aversion And A Drawdown Constraint written by Xun Li and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2022 with categories.
This paper studies a life-cycle optimal portfolio-consumption problem when the consumption performance is measured by a shortfall aversion preference subjecting to an additional drawdown constraint on consumption rate. Meanwhile, the agent also dynamically chooses her life insurance premium to maximize the expected bequest at the death time. By using dynamic programming arguments and the dual transform, we solve the HJB variational inequality explicitly in a piecewise form across different regions and derive some thresholds of the wealth variable for the piecewise optimal feedback controls. Taking advantage of our analytical results, we are able to numerically illustrate some quantitative impacts on optimal consumption and life insurance by model parameters and discuss their financial implications.
Asset Allocation Advice
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Author : Michael J. Stutzer
language : en
Publisher:
Release Date : 2004
Asset Allocation Advice written by Michael J. Stutzer and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2004 with categories.
Researchers studying the asset allocation problem for long-term investors have employed different investor criterion functions. Some analyses have been based on maximization of expected utility. The most commonly used utilities are quadratic utility, which yields the ubiquitous mean-variance utility function underlying modern portfolio theory, and constant relative risk aversion (CRRA) power utility. Both utilities require an assumed value or measurement of a utility risk aversion parameter appropriate to a particular investor. But there are no scientifically validated procedures for accurately assessing an individual's risk aversion parameter, and some have suggested that all such procedures are doomed to failure. Other analyses have been based on minimizing the probability of falling short of a particular investor's long-term goals or investable benchmark he/she would like to beat. The target shortfall probability approach may be easier to motivate and explain to investors, and obviates the need to assess a risk aversion parameter. But early criticisms from expected utility advocates cast doubt on the prescriptive usefulness of other criteria that depend on shortfall probabilities. I argue that conventional CRRA utility and shortfall probability analyses can be reconciled by simply eliminating the conventional assumption that the utility's risk aversion parameter is not ALSO determined by maximization of expected utility. The simplest asset allocation problem is used to illustrate this result. The results are quite sensible, and lead to a re-examination of expected utility advocates' arguments for the conventional use of expected utility and against the minimization of target shortfall probability. Neither the former nor the latter are as important as expected utility advocates believe.
Behavioral Finance The Second Generation
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Author : Meir Statman
language : en
Publisher: CFA Institute Research Foundation
Release Date : 2019-12-02
Behavioral Finance The Second Generation written by Meir Statman and has been published by CFA Institute Research Foundation this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019-12-02 with Business & Economics categories.
Behavioral finance presented in this book is the second-generation of behavioral finance. The first generation, starting in the early 1980s, largely accepted standard finance’s notion of people’s wants as “rational” wants—restricted to the utilitarian benefits of high returns and low risk. That first generation commonly described people as “irrational”—succumbing to cognitive and emotional errors and misled on their way to their rational wants. The second generation describes people as normal. It begins by acknowledging the full range of people’s normal wants and their benefits—utilitarian, expressive, and emotional—distinguishes normal wants from errors, and offers guidance on using shortcuts and avoiding errors on the way to satisfying normal wants. People’s normal wants include financial security, nurturing children and families, gaining high social status, and staying true to values. People’s normal wants, even more than their cognitive and emotional shortcuts and errors, underlie answers to important questions of finance, including saving and spending, portfolio construction, asset pricing, and market efficiency.
Portfolio Management
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Author : Scott D. Stewart
language : en
Publisher: John Wiley & Sons
Release Date : 2019-03-26
Portfolio Management written by Scott D. Stewart and has been published by John Wiley & Sons this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019-03-26 with Business & Economics categories.
A career’s worth of portfolio management knowledge in one thorough, efficient guide Portfolio Management is an authoritative guide for those who wish to manage money professionally. This invaluable resource presents effective portfolio management practices supported by their underlying theory, providing the tools and instruction required to meet investor objectives and deliver superior performance. Highlighting a practitioner’s view of portfolio management, this guide offers real-world perspective on investment processes, portfolio decision making, and the business of managing money for real clients. Real world examples and detailed test cases—supported by sophisticated Excel templates and true client situations—illustrate real investment scenarios and provide insight into the factors separating success from failure. The book is an ideal textbook for courses in advanced investments, portfolio management or applied capital markets finance. It is also a useful tool for practitioners who seek hands-on learning of advanced portfolio techniques. Managing other people’s money is a challenging and ever-evolving business. Investment professionals must keep pace with the current market environment to effectively manage their client’s assets while students require a foundation built on the most relevant, up-to-date information and techniques. This invaluable resource allows readers to: Learn and apply advanced multi-period portfolio methods to all major asset classes. Design, test, and implement investment processes. Win and keep client mandates. Grasp the theoretical foundations of major investment tools Teaching and learning aids include: Easy-to-use Excel templates with immediately accessible tools. Accessible PowerPoint slides, sample exam and quiz questions and sample syllabi Video lectures Proliferation of mathematics in economics, growing sophistication of investors, and rising competition in the industry requires advanced training of investment professionals. Portfolio Management provides expert guidance to this increasingly complex field, covering the important advancements in theory and intricacies of practice.
Finance For Normal People
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Author : Meir Statman
language : en
Publisher: Oxford University Press
Release Date : 2017
Finance For Normal People written by Meir Statman and has been published by Oxford University Press this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with Business & Economics categories.
Finance for Normal People teaches behavioral finance to people like you and me - normal people, neither rational nor irrational. We are consumers, savers, investors, and managers - corporate managers, money managers, financial advisers, and all other financial professionals. The book guides us to know our wants-including hope for riches, protection from poverty, caring for family, sincere social responsibility and high social status. It teaches financial facts and human behavior, including making cognitive and emotional shortcuts and avoiding cognitive and emotional errors such as overconfidence, hindsight, exaggerated fear, and unrealistic hope. And it guides us to banish ignorance, gain knowledge, and increase the ratio of smart to foolish behavior on our way to what we want. These lessons of behavioral finance draw on what we know about us-normal people-including our wants, cognition, and emotions. And they draw on the roles of these factors in saving and spending, portfolio construction, returns we can expect from our investments, and whether we can hope to beat the market. Meir Statman, a founder of behavioral finance, draws on his extensive research and the research of many others to build a unified structure of behavioral finance. Its foundation blocks include normal behavior, behavioral portfolio theory, behavioral life-cycle theory, behavioral asset pricing theory, and behavioral market efficiency.
Risk Aversion In Regulatory Capital Principles
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Author : Tiantian Mao
language : en
Publisher:
Release Date : 2019
Risk Aversion In Regulatory Capital Principles written by Tiantian Mao and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
We incorporate a notion of risk aversion favoring prudent decisions from financial institutions into regulatory capital calculation principles. In the context of Basel III, IV as well as Solvency II, regulatory capital calculation is carried out through the tools of monetary risk measures. The notion of risk aversion that we focus on has four equivalent formulations: through consistency with second-order stochastic dominance, or with conditional expectations, or with portfolio diversification, and finally through expected social impact. The class of monetary risk measures representing this notion of risk aversion is referred to as consistent risk measures. We characterize the class of consistent risk measures by establishing an Expected Shortfall-based representation, and as a by-product, we obtain new results on the representation of convex risk measures. We present several examples where consistent risk measures naturally appear. Using the obtained representation results, we study risk sharing and optimal investment problems and find several new analytical solutions.
Portfolio Theory And Performance Analysis
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Author : Noel Amenc
language : en
Publisher: John Wiley & Sons
Release Date : 2005-01-21
Portfolio Theory And Performance Analysis written by Noel Amenc and has been published by John Wiley & Sons this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005-01-21 with Business & Economics categories.
For many years asset management was considered to be a marginal activity, but today, it is central to the development of financial industry throughout the world. Asset management's transition from an "art and craft" to an industry has inevitably called integrated business models into question, favouring specialisation strategies based on cost optimisation and learning curve objectives. This book connects each of these major categories of techniques and practices to the unifying and seminal conceptual developments of modern portfolio theory. In these bear market times, performance evaluation of portfolio managers is of central focus. This book will be one of very few on the market and is by a respected member of the profession. Allows the professionals, whether managers or investors, to take a step back and clearly separate true innovations from mere improvements to well-known, existing techniques Puts into context the importance of innovations with regard to the fundamental portfolio management questions, which are the evolution of the investment management process, risk analysis and performance measurement Takes the explicit or implicit assumptions contained in the promoted tools into account and, by so doing, evaluate the inherent interpretative or practical limits
Hedge Fund Payoffs And Loss Aversion
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Author : Arjen Siegmann
language : en
Publisher:
Release Date : 2003
Hedge Fund Payoffs And Loss Aversion written by Arjen Siegmann and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2003 with categories.
For an agent with loss averse preferences we derive the optimal payoffs with one option. A total of four different payoffs are found to be optimal, depending on the strike price of the option and whether the initial position of the agent is one of surplus or shortfall. Our results have implications for the hedge fund industry, where funds typically display nonlinear payoffs. Manager compensation typically includes a high-water mark for the incentive fee, which is a likely candidate for the reference point in loss averse preferences. The shape of the optimal payoffs for an initial shortfall position corresponds either to a short put or short straddle. This can be related to managers that are below their customary return, suggesting that investment strategies creating a short put payoff like those followed by LTCM might be driven by loss averse preferences. Furthermore, the steepness of the payoffs under loss aversion increases in the difference to an initial reference point, which corresponds to hedge funds increasing their risk when performance falls further behind.