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Loss Aversion: A Comparison of Investment Decision Making Between Individual Investors and Pension Funds in Brazil

Keywords: utility maximization , loss aversion , risk aversion , Brazilian stock market , prospect theory.

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This article compares the application of a loss aversion utility function with a traditional Von Neumann-Morgenstern utility function aiming to test whether the first form of utility could better replicate the actual behavior of Brazilian investors concerning the choice of optimum investment portfolio. The results generated by both functions, in terms of stock market participation in the optimum investment portfolio, are compared with real aggregate data from two types of Brazilian investors (pension funds and individual investors). The analysis indicates that: i) the traditional utility function should be rejected as an adequate model to replicate Brazilian individual investors behavior in the stock market; and ii) Brazilian individual investors behavior are better replicated by a loss aversion utility function.


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