Risk Averse or Loss Averse: The Behaviour of UK Personal Investors

This paper reports the results of a detailed investigation of the risk-averse and loss-averse behaviour of UK individual investors. An one-period analytical model of investing behaviour is developed to explore the differences between individuals who are risk averse, and those whose behaviour is better described by Kahneman & Tversky’s Prospect Theory. Questionnaire data on risk perceptions is used to obtain non-parametric measures of the degree of investor risk aversion and loss aversion, and to test the predictions of the model. In general, the empirical analysis confirms the predictions from the SEUT and particularly Prospect Theory. For individuals with low levels of loss aversion, the analysis demonstrates a clear inverse relationship between risk and ownership. However the behaviour revealed by individuals with high levels of loss aversion is very different: these people may increase their holdings of risky assets following a meanpreserving increase in risk, if their levels of risk aversion were sufficiently high.