Assessing risk and loss aversion: COVID-19 and investor behavior in the Polish stock market

Michał Łukowski, Paweł Śliwiński, Kamil Gemra and Janusz Maruszewski

Central European Management Journal, 2025, vol. 34, issue 4, 610-626

Abstract: PurposeThe paper examines the changes in the profile of investors on the Warsaw Stock Exchange before and during the COVID-19 pandemic. Our goal is to identify the impact of the pandemic outbreak on portfolios, the intensity of investors’ biases and possible consequences to the decision-making process, manifested in prospect theory.Design/methodology/approachThe research presented in this paper is based on the representative surveys conducted among Polish individual investors in 2019 and 2020. In the first part of the study, we present descriptive statistics of the sample and test for its representativeness. Later, we test the differences between the surveys. In the second part, which aims to identify the investors’ decision-making process influenced by the pandemic outbreak, we use the modified Lucas utility function to identify investors’ biases and apply it to the prospect theory value function.FindingsWe find evidence that the market situation observed in 2020 has significantly changed attitudes towards portfolio management, altered investors’ utility functions and shaped their expectations. Our research shows that risk aversion increased while loss aversion decreased during the pandemic. Taken together, these two factors provide a good illustration of the impact of the March 2020 market crash on investors’ preferences – an increase in risk aversion leads to faster closing of loss-making and profitable positions, but the decrease in loss aversion means that investors would be less interested in holding loss-making positions longer than profitable ones. Thus, our study contributes to the behavioral finance literature under the specific conditions of the COVID-19 pandemic.Originality/valueOur research is based on unique data collected from investors in our online survey just before and during the outbreak of the Covid-19 pandemic. This gives us a valuable opportunity to analyze the changes to portfolios and behavioral biases among investors resulting from a shift in volatility.

Keywords: Behavioral biases; Prospect theory; Risk aversion; Loss aversion; Investor utility function; COVID-19 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cemjpp:cemj-02-2024-0047

DOI: 10.1108/CEMJ-02-2024-0047

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