Dollar-cost averaging and prospect theory investors: An explanation for a popular investment strategy
Journal of Behavioral Finance | 03/2011
Dollar-cost averaging requires investing equal amounts of an investment sum step-by-step in regular time intervals. Previous studies that assume expected utility investors were unable to explain the popularity of dollar-cost averaging. Statman  argues that dollar-cost averaging is consistent with the positive framework of behavioral finance. We assume a prospect theory investor who implements a strategic asset allocation plan and has the choice to shift the portfolio immediately (comparable to a lump sum) or on a step-by-step basis (dollar-cost averaging). Our simulation results support Statman's  notion that dollar-cost averaging may not be rational but a perfectly normal behavior.