How Loss Averse are Investors in Financial Markets?
47 Pages Posted: 22 Apr 2003 Last revised: 4 May 2010
Date Written: February 19, 2010
We investigate loss aversion in financial markets using a typical asset allocation problem. Our theoretical and empirical results show that investors in financial markets are more loss averse than assumed in the literature. Moreover, loss aversion changes depending on market conditions; investors become far more loss averse during bull markets than during bear markets, indicating their more profound disutility for losses when others enjoy gains. Contrary to most previous results, we find that investors are more sensitive to changes in losses than changes in gains.
Keywords: Loss Aversion Utility, Prospect Theory, Asset Allocation
JEL Classification: G11
Suggested Citation: Suggested Citation