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.
Guasoni P, Huberman G, Ren D (2020). Shortfall aversion. MATHEMATICAL FINANCE, 30(3), 869-920 [10.1111/mafi.12239].
Shortfall aversion
Guasoni P
Co-primo
;
2020
Abstract
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.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
