Abstract
How do prior outcomes affect the risk choice? Research on this can help people to understand investors’ dynamic decisions in financial market. This paper puts forward a new value function. By analyzing the new value function, we find that the prior gains and losses have an impact on the form of value function and the current investors’ risk attitude. Then the paper takes the behavior of the whole stock market as the research object, adopts aggregative index number of 14 representative stocks around the world as samples, and establishes a TVRA-GARCH-M model to investigate the influences of prior gains and losses on the current risk attitude. The empirical study indicates that, at the whole market level, prior gains increase people’s current willingness to take risk assert; that is to say, the house money effect exists in the market, while people are more risk aversion following prior losses.
Highlights
Investing behavior under risk in financial market is a kind of dynamic decision-making behavior, and different risk attitude of investors will lead them to different risk decisionmaking
The paper takes the behavior of the whole stock market as the research object, adopts aggregative index number of 14 representative stocks around the world as samples, and establishes a TVRA-GARCH-M model to investigate the influences of prior gains and losses on the current risk attitude
According to viewpoints of Thaler and Johnson [1], combined with analysis of prospect theory, this is because when investors get prior gains, this part of gains is an independent mental account in editing stage, is segregated from the mental account of initial asset, and is regarded as “house money,” investors will consider that the gains can offset subsequent possible losses, and in subsequent investing behaviors, the extent of their risk aversion decreases; that is, they become more risk seeking, while with prior losses, investors dislike losses and become more sensitive to subsequent possible losses, so the “painful” feelings intensify; they become more risk aversion
Summary
Investing behavior under risk in financial market is a kind of dynamic decision-making behavior, and different risk attitude of investors will lead them to different risk decisionmaking. Their empirical evidence suggests that the house money effect is discernible in the real world financial markets and not just in artificial laboratory experiments It can be seen from the literature review that most of the past empirical researches on the relationship between prior outcomes and current risk attitude are done with the help of psychological experiments and data of investors’ transaction accounts. This paper takes the behavior of the whole stock market as the research object, adopts aggregative index number of 14 representative stocks around the world as samples, and establishes a TVRAGARCH-M model to investigate the influence of prior gains and losses on current risk attitude.
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