I am happy to announce that the first draft of my new working paper Dynamic Portfolio Choice with Regret Aversion and Rejoicing with my student Djep Dorelijers has been released.
This paper analytically assesses the optimal investment problem for a regret-averse investor. Extending CRRA utility to regret and rejoicing, we propose a multiplicative regret utility function. The agent can invest in a risk-free asset and in a risky asset. Closed-form solutions are derived utilizing a dynamic optimization approach solving the Hamilton-Jacobi-Bellman equation. We show how the optimal investment strategy for a regret-averse investor depends on the chosen benchmark investment strategy if she feels regret due to foregone profits. It is shown that the more regret-averse the agent is, the more she mimics the benchmark strategies. We extend this approach to settings with multiple benchmarks, multiple assets, and consumption decisions.
