The impact of regret and rejoicing on risky asset allocation.

Summary In this article, we propose to analyze the impact of regret and happiness on the allocation of risky assets. Regret and rejoicing are two emotions that are defined by comparing the outcome of an action chosen by an agent with the outcome that the agent could have obtained by choosing an alternative action. We show that the choice of the alternative action impacts the allocation of risky assets. When the latter is defined in relation to the maximum expected outcome ex post, the agent perceives only regret. This can lead him, for low values of the marginal cost of risk, to retain more risky assets than would an agent maximizing a standard utility expectation. On the contrary, when the agent expresses a preference for certainty, and defines his emotions in relation to what he would get from a total investment in the risk-free asset, we show that the investment in risky assets is lower than the investment made by an agent maximizing a standard utility expectation.