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Jun. 3 | How Endogenization of the Reference Point Affects Loss Aversion: A Study of Portfolio Selection



Jun.3 (Thursday),15:00-16:30 


Science Building A1514, Tencent Conference ID:871139774


Moris Simon Strub, Assistant Professor, Business School, Southern University of Science and Technology


We study the implications of various models of reference point formation on optimal decision making in the context of portfolio optimization under loss aversion. Specifically, we first consider the partially endogenous model of De Giorgi and Post [Management Science 57 (6):1094--1110, 2011], where the reference point is determined in equilibrium but contains an exogenous component. We find that optimal trading behavior is as if the reference point were completely exogenous and that allowing for a mental adjustment of the reference point solely manifests itself in a lower degree of loss aversion. We then propose two novel models of reference point formation: A model of a reference point determined by optimal expectations, and a model of mental reference point updating. Our conclusions on the effect of an endogenized reference point on portfolio selection under loss aversion are also confirmed under these two models. These findings suggest that it is difficult to separately identify an agent's degree of loss aversion and his/her reference point, and may help to explain why experienced and sophisticated agents appear to be less loss averse than expected in some field settings. Our models also predict that displays of loss aversion are decreasing in the duration a decision maker is given to contemplate a decision.

Brief introduction of the speaker:

Moris Strub joined the School of Business of Southern University of Science and Technology in October 2019. His main research fields are portfolio selection, behavioral finance and economics, financial mathematics, risk management and robo-advisory. Moris is particularly willing to use mathematics as a tool to solve problems that require insights from various fields. He obtained a Bachelor of Science in Mathematics and a Master of Science in Applied Mathematics from ETH Zurich, and a PhD in Financial Engineering from the Chinese University of Hong Kong. Before joining Southern University of Science and Technology, he worked as a post-doctoral researcher at the Chinese University of Hong Kong and an assistant researcher at Columbia University. His main papers have been published in high-level journals such as Journal of Economic Dynamics and Control and Mathematical Finance, Finance and Stochastics, and Operations Research.