Loss-aversion and household portfolio choice
Dimmock, Stephen G.
Date of Issue2009
College of Business (Nanyang Business School)
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.
Journal of empirical finance
© 2009 Elsevier B.V. This is the author created version of a work that has been peer reviewed and accepted for publication by Journal of Empirical Finance, Elsevier B.V. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [http://dx.doi.org/10.1016/j.jempfin.2009.11.005].