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.

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Keywords limited participation, loss aversion, portfolio choice, prospect theory, stock market participation
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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