Loss-Aversion and Household Portfolio Choice
Stephen G. Dimmock
Nanyang Technological University - Division of Finance
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Mahidol University - College of Management
June 1, 2010
Journal of Empirical Finance, Vol. 17, No. 3, pp. 441-459, 2010
In this paper we empirically test if loss-aversion affects household participation in equity markets, household allocations to equity, and household allocations between mutual funds and individual stocks. Using household survey data, we obtain direct measures of each surveyed household's loss-aversion coefficient from questions involving hypothetical payoffs. We find that higher loss-aversion is associated with a lower probability of participation. We also find that higher loss-aversion reduces the probability of direct stockholding by significantly more than the probability of owning mutual funds. After controlling for sample selection we do not find a relationship between loss-aversion and portfolio allocations to equity.
Keywords: Portfolio choice, Loss-aversion, Stock market participation, Limited participation, Prospect theory
JEL Classification: G11, D14, D1Accepted Paper Series
Date posted: April 15, 2011
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