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Mental Accounting, Loss Aversion, and Individual Stock Returns

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  • Nicholas Barberis
  • Ming Huang

Abstract

We study equilibrium firm‐level stock returns in two economies: one in which investors are loss averse over the fluctuations of their stock portfolio, and another in which they are loss averse over the fluctuations of individual stocks that they own. Both approaches can shed light on empirical phenomena, but we find the second approach to be more successful: In that economy, the typical individual stock return has a high mean and excess volatility, and there is a large value premium in the cross section which can, to some extent, be captured by a commonly used multifactor model.

Suggested Citation

  • Nicholas Barberis & Ming Huang, 2001. "Mental Accounting, Loss Aversion, and Individual Stock Returns," Journal of Finance, American Finance Association, vol. 56(4), pages 1247-1292, August.
    • Handle: RePEc:bla:jfinan:v:56:y:2001:i:4:p:1247-1292
    DOI: 10.1111/0022-1082.00367
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