The Impact of Loss Aversion on Investment Choice

Abstract

Our aim is to find how asset allocation decisions might vary with investor’s attitude about loss aversion. Based on the loss aversion theory, we modified the returns of the risky assets of the Mean-variance model, and set up an investor’s objective function. By the empirical research, we show that the investor’s feeling of loss aversion can have a potent effect on investment choice. Compared with a risk-averse investor, the investor who takes loss aversion into account will hold less risky assets. We also find that the degree of the investor’s feeling of loss aversion can have significant impact on investment choice. The higher the degree is, the less the investor would invest in the risky assets.