How Loss Averse are Investors in Financial Markets?

47 Pages Posted: 22 Apr 2003 Last revised: 4 May 2010

See all articles by Soosung Hwang

Soosung Hwang

Sungkyunkwan University - Department of Economics

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

Date Written: February 19, 2010

Abstract

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

Hwang, Soosung and Satchell, Stephen E., How Loss Averse are Investors in Financial Markets? (February 19, 2010). Available at SSRN: https://ssrn.com/abstract=383942 or http://dx.doi.org/10.2139/ssrn.383942

Soosung Hwang (Contact Author)

Sungkyunkwan University - Department of Economics ( email )

25-2 Sungkyunkwan-ro
Jongno-Gu
110-745 Seoul
+82 (0)2 760 0489 (Phone)
+82 (0)2 744 5717 (Fax)

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
44 (0)1223 335213 (Phone)
44 (0)1223 335475 (Fax)

HOME PAGE: http://www.econ.cam.ac.uk/faculty/satchell/index.h

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