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Article
| Journal of Portfolio Management
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fall 2011
How Institutional Investors Frame Their Losses: Evidence on Dynamic Loss Aversion from Currency Portfolios
by
Kenneth A. Froot, J. Arabadjis, S. Cates and S. Lawrence
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Abstract
Currency investors exhibit a tendency to cut risk by pairing both longs and shorts following losses and a weaker tendency to add risk following gains. By differentiating between position level, portfolio level, and aggregate cross-portfolio losses in currency investments, we demonstrate that this dynamic loss aversion spans multiple frames of reference. Losses are not compartmentalized; rather a loss in one currency may impact trading in another. We also show that while the impact of a loss on subsequent trading decisions does linger, the affect declines sharply after a losing position is closed.
Keywords: Loss aversion;
Decision Choices and Conditions;
Currency;
Investment;
Risk Management;
Behavioral Finance;