Thursday April 14^th from 13h30 to 14h30

Financial investment advice that allows for reference-dependent preferences.

With Prof. Benedict G.C. Dellaert

Abstract:

A primary objective of investment advice is to accurately match financial products to consumers’ preferences. Typically, the matching is based on a measurement of consumers’ trade-offs between investment risks and returns, which then guides the selection of an investment portfolio on the market’s efficient frontier. However, beyond risk-return trade-offs, consumers also often wish to mitigate potential low returns with respect to a reference point. For instance, they may not want to end up with an amount that is below a target outcome. To allow for the impact of such reference-dependence in risk-return preferences, this paper proposes a new investment profiling method that combines interactive, frequency-based risk preference elicitation with reference-dependent utility model estimation. The method can be used by firms that wish to generate investment advice that allows for preference discontinuities due to reference-dependence. The results of an incentive-aligned empirical study and a simulation analysis illustrate the importance of reference points as a critical component of consumers’ risk-return preferences. The paper discusses implications for financial advice in terms of balancing the goals of optimal risk-return preference matching and reference-point based mitigation of low outcomes.

The seminar will be:

📍 At emlyon Ecully campus: Learning Lab building B

💻 On zoom: link provided at registration