I am excited to share that my paper Dynamic Portfolio Choice with Regret Aversion and Rejoicing (joint work with Djep Doreleijers) has been accepted for publication at Finance Research Letters. Djep and I started this project in late 2023 when he was writing his master thesis under my supervision. Now Djep is my PhD student, and I am particularly proud of him, because it is absolutely not common for students to turn their Master’s thesis into research publications. Congratulations Djep and thanks a lot for all your hard work on this paper!
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-rejoicing utility function. The agent can invest in a risk-free asset and in a risky asset. We derive closed-form solutions and show how the optimal investment strategy depends on the chosen benchmark investment strategy if she feels regret due to foregone profits. The more regret-averse the agent is, the more she is tilted towards the benchmark strategies. We extend this approach to settings with multiple benchmarks and provide some numerical illustrations.
