Shortfall Aversion

43 Pages Posted: 15 Feb 2015 Last revised: 28 Sep 2017

See all articles by Paolo Guasoni

Paolo Guasoni

Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences; University of Bologna - Department of Statistics

Gur Huberman

Columbia University - Columbia Business School, Finance

Dan Ren

University of Dayton

Multiple version iconThere are 3 versions of this paper

Date Written: September 27, 2017

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.

Keywords: loss aversion, portfolio choice, consumption, endowments

JEL Classification: G11, G12

Suggested Citation

Guasoni, Paolo and Guasoni, Paolo and Huberman, Gur and Ren, Dan, Shortfall Aversion (September 27, 2017). Columbia Business School Research Paper No. 15-22, Available at SSRN: https://ssrn.com/abstract=2564704 or http://dx.doi.org/10.2139/ssrn.2564704

Paolo Guasoni

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

HOME PAGE: http://www.guasoni.com

University of Bologna - Department of Statistics ( email )

Bologna, 40126
Italy

Gur Huberman (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Dan Ren

University of Dayton ( email )

300 College Park
Dayton, OH 45469
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
97
Abstract Views
1,095
Rank
144,659
PlumX Metrics