First Order Loss Aversion and Optimal Consumption
15 Pages Posted: 25 Sep 2015
Date Written: September 23, 2015
We consider a model for utility over consumption with first order loss aversion and look at its properties. We find consumption strategies that maximize expected utility for complete markets with pricing kernels generated by Levy processes. Both the discrete-time and continuous-time consumption strategies are illustrated. When loss aversion vanishes, we recover the Samuelson-Merton solution, and when loss aversion becomes infinite, we recover the Duesenberry-Dybvig solution.
Keywords: First order loss aversion, Expected utility maximization
JEL Classification: D91
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