Why Investors are Loss Averters During Bull Markets and Gain Seekers During Bear Markets?

13 Pages Posted: 15 Aug 2015

See all articles by Robert Bordley

Robert Bordley

University of Michigan at Ann Arbor

Luisa Tibiletti

University of Turin - Department of Management

Date Written: August 13, 2015

Abstract

How does market trend sentiment affect investors’ asymmetric loss-gain tradeoffs? Several empirical tests indicate that investors are far more loss adverse during bull markets than during bear markets (see Hwang and Satchell, 2010; Hofschire et al, 2013). In this paper we provide a sound theoretical foundation for this empirical evidence. First, we discuss how to identify the subjectively perceived market trend sentiment. Then, we propose a reference dependent definition of loss aversion and gain appetite, that generalizes the Kahneman and Tversky (1979, p. 279) and Kahneman and Tversky (1992, p. 303) loss aversion definitions. Under mild technical assumptions on utility functions, asymmetrical loss-gain evaluations are normatively influenced by the investor perceived market trend. Specifically, investors are normatively lead to loss aversion during perceived bullish markets and to risk appetite during perceived bearish markets. This market trend dependence holds for the most popular utility functions used in the expected utility and prospect theory.

Keywords: Market sentiment, Investor sentiment, Bull and bear markets, Loss-gain asymmetry, Disposition Effect, van Zwet asymmetry conditions, Pearson utility functions.

JEL Classification: G1, D81.

Suggested Citation

Bordley, Robert and Tibiletti, Luisa, Why Investors are Loss Averters During Bull Markets and Gain Seekers During Bear Markets? (August 13, 2015). Available at SSRN: https://ssrn.com/abstract=2643469 or http://dx.doi.org/10.2139/ssrn.2643469

Robert Bordley

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

Luisa Tibiletti (Contact Author)

University of Turin - Department of Management ( email )

C.so Unione Sovietica, 218 bis
Turin, Turin 10100
Italy
39-11-670-6229 (Phone)
39-11-670-6238 (Fax)

HOME PAGE: http://www.management.unito.it/tibiletti

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