Dynamic portfolio choice with regret aversion and rejoicing

This paper analytically assesses the optimal investment problem for a regret-averse investor. Extending CRRA utility to regret and rejoicing, we propose a multiplicative regret-rejoicing utility function. The agent can invest in a risk-free asset and in a risky asset. We derive closed-form solutions and show how the optimal investment strategy depends on the chosen benchmark investment strategy if she feels regret due to foregone profits. The more regret-averse the agent is, the more she is tilted towards the benchmark strategies. We extend this approach to settings with multiple benchmarks and provide some numerical illustrations.