Loss Aversion: A Medium where Better Environment Translates into Inferior Performance
46 Pages Posted: 26 Mar 2008 Last revised: 27 May 2010
Date Written: May 18, 2008
This paper develops a formal model to detect whether loss aversion, as a stable feature, serves as a medium for translating better environment into inferior performance. We show that environmental improvements induce a structural behavior change of loss-averse investors, which in turn leads to active trading and performance deterioration. We also find that both the growth level of trading volume and the performance decrement level demonstrate the same tendencies with the utilization degree of environmental improvements. We use this direct link between better environment and inferior performance to shed light on the documented paradoxical situation of on-line trading.
Keywords: Portfolio choice, loss aversion, investment flexibility, information feedback
JEL Classification: G11, D80
Suggested Citation: Suggested Citation