Empirical Evidence of Loss Aversion and Individualism Around the World

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We investigate investors’ loss aversion for different asset classes using a reference-dependent utility. We show that optimal investment proportions in risky assets in-crease when risk aversion or loss aversion decreases, and that loss aversion increases with expected excess returns. The positive relationship between loss aversion and expected excess returns suggests that the equity premium puzzle can be explained by investors’ high loss aversion for equities. Under the assumption that decreasing absolute risk aversion holds, loss aversion increases with wealth, which is supported by our empirical results with asset allocation in pension funds of 31 OECD countries. Individualism is also positively related to loss aversion in equities and bonds, indicating that the overconfidence represented by individualism leads to more disappointment when losses occur.