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Loss Aversion in Aggregate Macroeconomic Time Series

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  • Dr. Rina Rosenblatt-Wisch

Abstract

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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  • Dr. Rina Rosenblatt-Wisch, 2007. "Loss Aversion in Aggregate Macroeconomic Time Series," Working Papers 2007-06, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2007-06
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    2. Jan-Emmanuel De Neve & George Ward & Femke De Keulenaer & Bert Van Landeghem & Georgios Kavetsos & Michael I. Norton, 2018. "The Asymmetric Experience of Positive and Negative Economic Growth: Global Evidence Using Subjective Well-Being Data," The Review of Economics and Statistics, MIT Press, vol. 100(2), pages 362-375, May.
    3. Dräger, Lena & Lamla, Michael J. & Pfajfar, Damjan, 2020. "The Hidden Heterogeneity of Inflation and Interest Rate Expectations: The Role of Preferences," Hannover Economic Papers (HEP) dp-666, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät, revised Feb 2023.
    4. Daragh Clancy & Lorenzo Ricci, 2022. "Economic sentiments and international risk sharing," International Economics, CEPII research center, issue 169, pages 208-229.
    5. Amit Kothiyal & Vitalie Spinu & Peter Wakker, 2014. "An experimental test of prospect theory for predicting choice under ambiguity," Journal of Risk and Uncertainty, Springer, vol. 48(1), pages 1-17, February.
    6. Edsel L. Beja, 2017. "The Asymmetric Effects of Macroeconomic Performance on Happiness: Evidence for the EU," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 52(3), pages 184-190, May.
    7. Foellmi, Reto & Rosenblatt-Wisch, Rina & Schenk-Hoppé, Klaus Reiner, 2011. "Consumption paths under prospect utility in an optimal growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 273-281, March.
    8. Dominika Czyz & Karolina Safarzynska, 2023. "Catastrophic Damages and the Optimal Carbon Tax Under Loss Aversion," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 85(2), pages 303-340, June.
    9. Lena Dräger & Michael J. Lamla & Damjan Pfajfar, 2020. "The Hidden Heterogeneity of Inflation Expectations and its Implications," Finance and Economics Discussion Series 2020-054, Board of Governors of the Federal Reserve System (U.S.).
    10. Keith Blackburn & David Chivers, 2015. "Fearing the worst: the importance of uncertainty for inequality," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(2), pages 345-370, October.
    11. Foellmi, Reto & Jaeggi, Adrian & Rosenblatt-Wisch, Rina, 2019. "Loss aversion at the aggregate level across countries and its relation to economic fundamentals," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    12. Daragh Clancy & Lorenzo Ricci, 2019. "Loss aversion, economic sentiments and international consumption smoothing," Working Papers 35, European Stability Mechanism.
    13. Peters, Hans, 2012. "A preference foundation for constant loss aversion," Journal of Mathematical Economics, Elsevier, vol. 48(1), pages 21-25.
    14. Santoro, Emiliano & Petrella, Ivan & Pfajfar, Damjan & Gaffeo, Edoardo, 2014. "Loss aversion and the asymmetric transmission of monetary policy," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 19-36.
    15. Eleonora Pierucci & Luigi Ventura, 2010. "Risk Sharing: A Long Run Issue?," Open Economies Review, Springer, vol. 21(5), pages 705-730, November.
    16. Alexandros P. Bechlioulis & Sophocles N. Brissimis, 2021. "Are household consumption decisions affected by past due unsecured debt? Theory and evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 3040-3053, April.
    17. Li, Meng, 2023. "Loss aversion and inefficient general equilibrium over the business cycle," Economic Modelling, Elsevier, vol. 118(C).
    18. Lena Dr䧥r & Jan-Oliver Menz & Ulrich Fritsche, 2014. "Perceived inflation under loss aversion," Applied Economics, Taylor & Francis Journals, vol. 46(3), pages 282-293, January.
    19. Naumer, Hans-Jörg & Yurtoglu, Burcin, 2022. "It is not only what you say, but how you say it: ESG, corporate news, and the impact on CDS spreads," Global Finance Journal, Elsevier, vol. 52(C).
    20. Gomez, Wilman & Castrillon, Cristian & Montoya, Jaime, 2024. "Sector informal como amortiguador del ciclo económico: el papel de la aversión a la pérdida," Borradores Departamento de Economía 100, Universidad de Antioquia, CIE, revised 05 Nov 2024.
    21. Mumtaz, Haroon & Surico, Paolo, 2011. "Estimating the Aggregate Consumption Euler Equation with State-Dependent Parameters," CEPR Discussion Papers 8233, C.E.P.R. Discussion Papers.
    22. Ömür Saltık & Wasim ul Rehman & Rıdvan Söyü & Süleyman Değirmen & Ahmet Şengönül, 2023. "Predicting loss aversion behavior with machine-learning methods," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-14, December.

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    More about this item

    Keywords

    Ramsey growth model; loss aversion; prospect theory; GMM;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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