Ratchet vs Blase Investors and Asset Markets

This paper proposes a new wealth-dependent utility function for the inter- temporal consumption and portfolio problem, in which the subsistance (bliss) con- sumption level is a function of wealth. Ratchet efiects obtain when higher wealth in- creases the subsistance consumption level; blase behavior occurs when higher wealth reduces it. We have three contributions: (i) we identify closed-form solutions for optimal consumption and portfolio rules; (ii) we use the optimal rules to estimate the model using aggregate portfolio data, and (iii) we derive and discuss the pricing implications of our results. Our estimates are consistent with blase behavior and counter-cyclical risk aversion. JEL classiflcation: G11, G12.