Habit persistence reduces risk aversion

• Published in: Geneva papers on risk and insurance. Issues and practice Vol. 46; no. 2; pp. 214 - 223
• Main Author: Gollier, Christian
• Format: Journal Article
• Language: English
• Published: London Springer Science + Business Media 01.04.2021; Palgrave Macmillan UK; Palgrave Macmillan
• Subjects: Economics and Finance; Finance; Insurance; Risk aversion; Risk Management; Insurance demand; Dynamic portfolio choice; Equity premium; Time diversification; Additive habit

How does habit formation affect the dynamic demand for insurance and risky assets? We examine a dynamic portfolio-saving choice problem for two structures of preferences. In the first model, the consumer faces an exogenous path of minimum levels of subsistence over time. In the second model, these l...