This study extends the literature on portfolio choice under prospect theory preferences by introducing a two-period life cycle model, where the household decides on optimal consumption and investment in a portfolio with one risk-free and one risky asset. The optimal solution depends primarily on...

In this paper we analyze the two-period consumption-investment decision of a household with prospect theory preferences and an endogenous second period reference level which captures habit persistence in consumption and in the current consumption reference level. In particular, we examine three...

Prospect theory has been the focus of increasing attention in many Fields of economics. However, it has scarcely been addressed in macro-economic growth models - neither on theoretical nor on empirical grounds. In this paper we use prospect theory in a stochastic optimal growth model....

Prospect theory has been the focus of increasing attention in many Fields of economics. However, it has scarcely been addressed in macro-economic growth models - neither on theoretical nor on empirical grounds. In this paper we use prospect theory in a stochastic optimal growth model....