Loss Aversion in Aggregate Macroeconomic Time Series

No 2007-6, Working Papers from Swiss National Bank

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.

Keywords: Ramsey growth model; loss aversion; prospect theory; GMM (search for similar items in EconPapers)
JEL-codes: E21 O41 (search for similar items in EconPapers)
Date: Written 2007-04-30

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