Abstract
I solve the life-cycle portfolio allocation problem of a disappointment averse (DA) agent with labor income risk. DA preferences overweight disappointing outcomes and are consistent with behavior highlighted by the Allais paradox. I show that unlike constant relative risk aversion (CRRA) investors, DA investors drastically cut their allocation to stocks when they retire. This result is consistent with empirical evidence on portfolio shares and with the allocation rules of target-date retirement funds. I also show that sufficiently disappointment averse agents abstain from stocks after retirement, which is consistent with the observed low rates of stock market participation among retirees. I further show that when crashes are possible, agents with low levels of wealth invest little (or nothing) in the stock market.
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