Loss Aversion in Aggregate Macroeconomic Time Series

January 12, 2007
Issue 2007-06


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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JEL classification:
E21, O41
Ramsey growth model, loss aversion, prospect theory, GMM

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  • Dr. Rina Rosenblatt-Wisch

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