Abstract
I study the portfolio choice of an investor with asymmetric attitudes towards gains versus losses who invests in a stock, a bond and a put option. I demonstrate that a generalized disappointment-averse investor, who is loss-averse around a reference point that is lower than her certainty equivalent, optimally holds long positions in put options at observed market prices. This resolves the puzzling finding in previous literature that a wide range of expected and non-expected utility functions fail to generate demand for put options. Moreover, I demonstrate that this investor always holds risky securities, independently of her degree of loss aversion. This is in stark contrast to previous findings on market non-participation of a sufficiently disappointmentaverse investor, who is loss averse around her certainty equivalent. My results highlight that the endogenous reference point distinguishing gains and losses plays an important role in determining the optimal asset allocation.