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Loss Aversion in Aggregate Macroeconomic Time Series

Listed author(s):
  • Rina Rosenblatt-Wisch

Prospect theory has been the focus of increasing attention in many Fields of economics. However, it has scarcely been addressed in macro-economic growth models - neither on theoretical nor on empirical grounds. In this paper we use prospect theory in a stochastic optimal growth model. Thereafter, the focus lies on linking the Eulerequation obtained from a prospect theory growth model of this kind to real macroeconomic data. We will use Generalized Method of Moments (GMM) estimation to test the implications of such a non-linear prospect utility Euler equation. Our results indicate that loss aversion can be traced in aggregate macroeconomic time series.

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Paper provided by Swiss National Bank in its series Working Papers with number 2007-06.

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Length: 28 pages
Date of creation: 2007
Handle: RePEc:snb:snbwpa:2007-06
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