Economics Series, Institute for Advanced Studies 286
This research note examines the conditions which will induce a prospect theory type investor, whose reference level is set by 'playing it safe', to invest in a risky asset. The conditions indicate that this type of investor requires a large equity premium to invest in risky assets. However, once she does invest because of a large risk premium, she becomes aggressive and buys/sells till an externally imposed upper/lower bound is reached.
prospect theory loss aversion reference level non-investment in risky assets