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What Drives Risky Investments Lower Around Retirement?

I solve the life-cycle portfolio allocation problem of a disappointment averse (DA) agent. DA agents overweight disappointing outcomes. Unlike expected utility investors, DA investors drastically cut their allocation to stocks around retirement due to a distinct effect associated with the drop in income risk. The effect is driven by the changing comovement between returns and the disappointment/elation realization. The allocations are consistent with empirical evidence on portfolio shares and the allocation rules of target-date retirement funds. Sufficiently disappointment-averse agents abstain from investing in stocks after retirement, which is consistent with the observed low rates of stock market participation among retirees.