The Impact of Loss Aversion on Investment Choice

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.