Loss Aversion in Financial Markets

Journal of Mechanism and Institution Design, 2019, 4(1), 119 –137.

24 Pages Posted: 25 Feb 2020

See all articles by Liyan Yang

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: August 2019

Abstract

Experimental evidence suggests that people are more sensitive to losses than gains by a factor of about two. Researchers have drawn implications from loss aversion to understand various aspects of individual decisions and asset prices in financial markets. At the current stage, some ancillary assumptions have been made in deriving these implications. Loss aversion affects financial markets through affecting the risk attitudes of market participants. Taken as a whole, loss aversion is a useful ingredient in helping us understand financial markets.

Keywords: loss aversion, risk attitude, non-participation puzzle, disposition effect, equity premium puzzle, excess volatility, anomalies

Suggested Citation

Yang, Liyan, Loss Aversion in Financial Markets (August 2019). Journal of Mechanism and Institution Design, 2019, 4(1), 119 –137.. Available at SSRN: https://ssrn.com/abstract=3531959

Liyan Yang (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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