Loss Aversion in Aggregate Macroeconomic Time Series

Dr. Rina Rosenblatt-Wisch

Issue
2007-06

Pages
28

JEL classification
E21, O41

Keywords
Ramsey growth model, loss aversion, prospect theory, GMM

Year
2007

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.