Loss Aversion: A Medium where Better Environment Translates into Inferior Performance

46 Pages Posted: 26 Mar 2008 Last revised: 27 May 2010

See all articles by Jing Yao

Jing Yao

School of Economics, Fudan University

Zhongfei Li

Sun Yat-sen Business School, Sun Yat-sen University

Duan Li

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering & Engineering Management

Date Written: May 18, 2008

Abstract

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

Yao, Jing and Li, Zhongfei and Li, Duan, Loss Aversion: A Medium where Better Environment Translates into Inferior Performance (May 18, 2008). Available at SSRN: https://ssrn.com/abstract=1107597 or http://dx.doi.org/10.2139/ssrn.1107597

Jing Yao

School of Economics, Fudan University ( email )

600 Guoquan Road
Shanghai, Shanghai 200433
China

HOME PAGE: http://homepage.fudan.edu.cn/yaojing/

Zhongfei Li

Sun Yat-sen Business School, Sun Yat-sen University ( email )

No. 135, West Xingang Road
Guangzhou
China

Duan Li (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering & Engineering Management ( email )

Shatin, New Territories
Hong Kong
(852) 2609-8323 (Phone)
(852) 2609-5505 (Fax)

HOME PAGE: http://www.se.cuhk.edu.hk/~dli/

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