Optimal portfolio choice under loss aversion

Arjan B. Berkelaar, Roy Kouwenberg, Thierry Post

Research output: Contribution to journalReview articlepeer-review

204 Citations (Scopus)


This paper analyzes the optimal investment strategy for loss-averse investors, assuming a complete market and general Ito processes for the asset prices. The loss-averse investor follows a partial portfolio insurance strategy. When the investor's planning horizon is short (less than 5 years), he or she considerably reduces the initial portfolio weight of stocks compared to an investor with smooth power utility. The empirical section of the paper estimates the level of loss aversion implied by historical U.S. stock market data, using a representative agent model. We find that loss aversion and risk aversion cannot be disentangled empirically.

Original languageEnglish
Pages (from-to)973-987
Number of pages15
JournalReview of Economics and Statistics
Issue number4
Publication statusPublished - Nov 2004

ASJC Scopus subject areas

  • Social Sciences (miscellaneous)
  • Economics and Econometrics


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