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Loss Aversion: A Comparison of Investment Decision Making Between Individual Investors and Pension Funds in Brazil

Author

Listed:
  • Luiz Augusto Martits

    (EAESP/FGV, PUC-SP)

  • William Eid Junior

    (EAESP/FGV)

Abstract

This article compares the application of a loss aversion utility function with a traditional Von Neumann-Morgenstern utility function aiming to test whether the first form of utility could better replicate the actual behavior of Brazilian investors concerning the choice of optimum investment portfolio. The results generated by both functions, in terms of stock market participation in the optimum investment portfolio, are compared with real aggregate data from two types of Brazilian investors (pension funds and individual investors). The analysis indicates that: i) the traditional utility function should be rejected as an adequate model to replicate Brazilian individual investors behavior in the stock market; and ii) Brazilian individual investors behavior are better replicated by a loss aversion utility function.

Suggested Citation

  • Luiz Augusto Martits & William Eid Junior, 2009. "Loss Aversion: A Comparison of Investment Decision Making Between Individual Investors and Pension Funds in Brazil," Brazilian Review of Finance, Brazilian Society of Finance, vol. 7(4), pages 429-457.
    • Handle: RePEc:brf:journl:v:7:y:2009:i:4:p:429-457
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    More about this item

    Keywords

    utility maximization; loss aversion; risk aversion; Brazilian stock market; prospect theory.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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