Prospect Theory (PT), which relies on subjects' behavior as observed in laboratory experiments, contradicts the behavior predicted by the Expected Utility (EU) paradigm. Having wealth of $100,000 or having wealth of $90,000 and wining $10,000 in a lottery is the same by EU paradigm but not the...

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...