Abstract
In this paper we compare static and dynamic savings plans with lump sum investments from the perspective of a prospect theory investor. To evaluate these strategies we use an ex ante approach taking recourse to Monte Carlo Simulation and parameters from Tversky and Kahneman (1992) and check the stability of our results by using results from other literature. Process parameter values are derived from historical data in various countries. In a first step we calculate the optimal growth rate of dynamic savings plans. We find that the optimal growth rate is an increasing function of volatility, risk-free rate, sensitivity to losses and loss aversion coefficient and a decreasing function of drift rate and sensitivity to gains. Restricting to parameter values found in empirical literature, we observe that the optimal growth rate is highly negative. As static savings plans correspond to a dollar cost averaging strategy, our study also adds to the literature on dollar cost averaging, extending the settings of Leggio and Lien (2001) and Dichtl and Drobetz (2011) in several ways.
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