Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments October 22, 2017 erstellt
Description:
Prospect Theory (PT) and Constant Relative Risk Aversion (CRRA) have clear-cut implications for the optimal asset allocation between stocks and the risk-free asset as a function of the investment horizon. While CRRA preferences imply that the allocation should be independent of the horizon, we show that PT implies a dramatic and discontinuous “jump” to the maximal possible allocation to stocks as the horizon increases. We experimentally test these predictions at the individual level. We find very little support for PT with at most 6% of the choices supporting it. We find much stronger support for CRRA with 32%-44% of the choices conforming to it. Moreover, the aggregate allocation, which is relevant for asset pricing, conforms to CRRA. These findings provide some justification for economic models employing CRRA preferences, and suggest that the equity premium puzzle is yet to be solved