Investment Decision Under Constraint of Loss Aversion

Lose aversion refers to the psychological phenomenal that losses and disadvantages have greater impact on preferences than gains and advantages. While to a considerable extent, risk aversion as it is commonly observed is caused by loss aversion. This paper integrates Markowitz´s efficient frontier theory into lose aversion function, and the portfolio decision of lose averse investors has been discussed which relates expected return and volatility. Efficient Frontier based on lose aversion to maximize the expected utility is proposed in a numerical example which compares the efficient frontier with Markowitz´s and elaborates the relationship between portfolio and aversion coefficient. Since we may use some theory under Markowitz framework to analysis lose aversion, it will be very meaningful if this integrate extends to more complex lose aversion function.