Loss-aversion and household portfolio choice
In this paper we empirically test if loss-aversion affects household participation in equity markets, household allocations to equity, and household allocations between mutual funds and individual stocks. Using household survey data, we obtain direct measures of each surveyed household's loss-aversion coefficient from questions involving hypothetical payoffs. We find that higher loss-aversion is associated with a lower probability of participation. We also find that higher loss-aversion reduces the probability of direct stockholding by significantly more than the probability of owning mutual funds. After controlling for sample selection we do not find a relationship between loss-aversion and portfolio allocations to equity.
|Keywords||limited participation, loss aversion, portfolio choice, prospect theory, stock market participation|
|JEL||Household Behavior and Family Economics (jel D1), Personal Finance (jel D14), Portfolio Choice; Investment Decisions (jel G11)|
|Persistent URL||dx.doi.org/10.1016/j.jempfin.2009.11.005, hdl.handle.net/1765/23567|
|Series||ERIM Top-Core Articles|
|Journal||Journal of Empirical Finance|
Dimmock, S.G, & Kouwenberg, R.R.P. (2010). Loss-aversion and household portfolio choice. Journal of Empirical Finance, 17(3), 441–459. doi:10.1016/j.jempfin.2009.11.005