Measurement of Private Investor’s Loss Aversion


  • Stanislav Škapa


Expected utility theory, prospect theory, loss aversion, equity, bootstrap


Purpose of the article: This paper gives an empirical view on behaviorance of private investor who is loss averse and whether a loss aversive private investor should invest into such risky assets as equity? The main focus is on the use of robust statistical methods and prospect theory for estimation of equity indexes’ selected characteristics, mainly risk characteristics. The paper contains a detail discussion, which one risk metric for assets seems suitable for private investor who is loss averse. Scientific aim of this article: The aim of the article is a critically describe the problems related with private investor’s loss aversion behaviorance and how the concept of loss aversion should by applied into equities (or equity indices) investment. The crucial problem is how to measure loss aversion of private investor investing in equities. Methodology/methods: The primary and secondary research was applied. Selected scientific articles and other literature published with the topic of prospect theory and risk measurement are mainly used to support a critical analyse of how private investor’s loss aversion should be define and measured in the reality – in the financial/investment area. Next the primary research was done with selected equity indexes. As the representants of equity indexes were chosen not only “typical” representative as MSCI World index but mainly some derivatives of indexes which track a dividend strategy (indexes comprising stocks of companies that pay dividends). Findings: Loss aversive investor worries about any loss of value of their wealth. If these investors choose to invest in stocks they should prefer to invest in the stock indexes with down-side risk close to zero, respectively those indexes whose down-side risk is lowest among all. This down-risk should by measure with using belowtarget semivariance. A standard deviation method as a tool for measurement of risk for loss aversive investor is not so proper due the fact that large positive outcomes are treated as equally risky as large negative ones. In practice, however, positive outliers should be regarded as a bonus and not as a risk. Conclusions: A loss averse investors should some part of his/her wealth invest into equity indexes (may be 15%, max.25%). As the best equity index for a loss adverse investor was chosen Natural Monopoly Index 30 Infrastructure Global with the smallest down side risk.