TY - JOUR AU - Ang,Andrew AU - Bekaert,Geert AU - Liu,Jun TI - Why Stocks May Disappoint JF - National Bureau of Economic Research Working Paper Series VL - No. 7783 PY - 2000 Y2 - July 2000 UR - http://www.nber.org/papers/w7783 L1 - http://www.nber.org/papers/w7783.pdf N1 - Author contact info: Andrew Ang Columbia Business School 3022 Broadway 413 Uris New York, NY 10027 Tel: 212/854-9154 Fax: 212/662-8474 E-Mail: aa610@columbia.edu Geert Bekaert Graduate School of Business Columbia University 3022 Broadway, 411 Uris Hall New York, NY 10027 Tel: 212/854-9156 Fax: 212/662-8474 E-Mail: gb241@columbia.edu Jun Liu Rady School of Management UCSD Pepper Canyon Hall Room 320 9500 Gilman Dr MC 0093 La Jolla CA 92093 Tel: 310/825-4083 E-Mail: junliu@ucsd.edu AB - Recently much progress has been made in developing optimal portfolio choice models accomodating time-varying opportunity sets, but unless investors are unreasonably risk averse, optimal holdings include unreasonably large equity positions. One reason is that most studies assume investors behave as expected utility maximizers with power utility. In this article, we provide a formal treatment of both static and dynamic portfolio choice using the Disappointment Aversion preferences of Gul (1991). While different from the Kahneman-Tversky (1979) loss aversion utility, these preferences imply asymmetric aversion to gains versus losses and are consistent with the tendency of some people to like lottery-type gambles but dislike stock in-vestments. By calibrating a number of data generating processes to actual US data on stock and bond returns, we find very reasonable portfolios for moderately disappointment averse investors with utility functions exhibiting low curvature. Disappointment aversion preferences affect intertemporal hedging demands and the state dependence of asset allocation in such a way as to not be replicable by standard expected utility functions with higher curvature. Furthermore, it is easy to reconcile the large equity premium observed in the data with disappointment aversion utility of low curvature and reasonable disappointment aversion. ER -