Behavioral Biases and Investment
We investigate the way investors react to prior gains/losses. We directly examine investor reactions to different definitions of gains and losses (i.e., overall wealth, paper gains and losses, and realized capital gains and losses) and investigate how gains and losses in one category of wealth (e.g., real estate) affect holdings in other categories (e.g., financial assets). We show that investors change their holdings of risky assets as a function of both financial and real estate gains. Prior gains increase risk-taking, while prior losses reduce it. To interpret our results, we consider and compare three alternative hypotheses of investor behavior: prospect theory, house money effect and standard utility theory with decreasing risk aversion. Our evidence fails to support loss aversion, pointing in the direction of the house money effect or standard utility theory. Investors consider wealth in its entirety, and risk-taking in financial markets is affected by gains/losses in overall wealth, financial wealth, and real estate wealth. Copyright Springer 2005
Volume (Year): 9 (2005)
Issue (Month): 4 (December)
|Contact details of provider:|| Web page: http://springerlink.metapress.com/link.asp?id=111870|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Edin, P.-A. & Fredriksson, P., 2000.
"LINDA - Longitudinal INdividual DAta for Sweden,"
2000:19, Uppsala - Working Paper Series.
- Edin, Per-Anders & Fredriksson, Peter, 2000. "LINDA - Longitudinal INdividual DAta for Sweden," Working Paper Series 2000:19, Uppsala University, Department of Economics.
- Edin, P.-A. & Fredriksson, P., 2000. "LINDA - Longitudinal INdividual DAta for Sweden," Papers 2000-19, Uppsala - Working Paper Series.
When requesting a correction, please mention this item's handle: RePEc:kap:eurfin:v:9:y:2005:i:4:p:483-507. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.