Recent evidence suggests that investors either are inattentive to their portfolios or undertake puzzling rebalancing efforts. This paper develops a life-cycle portfolio-choice model in which the investor experiences loss-averse utility over news and can choose whether or not to look up his portfolio. I obtain three main predictions. First, the investor prefers to ignore and not rebalance his portfolio most of the time to avoid fluctuations in news utility. Such fluctuations cause a first-order decrease in expected utility because the investor dislikes bad news more than he likes good news. Consequently, the investor has a first-order willingness to pay a portfolio manager who rebalances actively on his behalf. Second, when the investor does look up his portfolio himself, he rebalances it extensively to hasten or delay the realization of good or bad news, respectively. Third, the investor would like to commit to being inattentive even more often because this would reduce overconsumption. Quantitatively, I structurally estimate the preference parameters by matching participation and stock shares over the life cycle. My parameter estimates are in line with the literature, generate reasonable intervals of inattention, and simultaneously explain consumption and wealth accumulation over the life cycle.
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Pagel, Michaela. "A News-Utility Theory for Inattention and Delegation in Portfolio Choice." Columbia Business School, 2014.
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