Explore the Factors That Influence and Mitigate Loss Aversion

Abstract

Loss aversion is another theoretical cornerstone of Kahneman and Tversky's prospect theor, which has been applied by behavioral economists in many fields such as consumption decisions, production/supply, investment[1]. Benartzi and Thaler first tried to explain the mystery of equity premium by using investors' loss aversion, and he focused on the impact of investors' investment performance evaluation period on investment returns[2]. Barberis combine traditional utility function and its prospect theory, suggests that due to the pain of loss to investors than equal comfort for investment returns, so investors must demand in order to avoid loss risk assets have higher expected return, on the contrary, because of risk-free bonds give investors with stable earnings, investors demand lower yields, Arjan discussed the optimal portfolio strategy for investors under loss aversion. Since the distribution of returns affects the explanatory power of loss aversion to the equity premium puzzle, Martin relaxed the assumption of independent and homogeneous distribution of returns in the model, and the application of a looser GARCH distribution supports the view that loss aversion can explain the equity premium puzzle[3]. Loss aversion is originally a branch of behavioral economics, which is widely used in all aspects of life and plays an important role in the overall industry design and planning. At the same time, this factor can be studied and discussed in the future. Finally, the above contents are summarized and analyzed to analyze the mitigating silver factors that may reduce the degree of loss aversion, and some suggestions and references are put forward for subsequent research.