Mathematics - Colloquium
Tuesday, September 10, 2013
3:30 PM-4:30 PM
ABSTRACT: We solve a model of consumption and investment for an agent who is averse to declines in the standard of living, assuming constant investment opportunities and an infinite horizon. The optimal policy is to consume at a constant rate, as long as this rate remains between two endogenous fractions of wealth. In good times, consumption rises to keep the consumption/wealth ratio above a minimum level. In bad times, consumption declines below the desired level, as to keep the portfolio solvent. Loss aversion reduces substantially the exposure to risky assets, implying an effective risk aversion much higher than the agent's true risk aversion.
Suggested Audiences: Adult, College
Last Modified: September 9, 2013 at 2:20 PM