Investor rationality with respect to loss aversion

Abstract

Investor Rationality has been a long researched topic by both behaviour economists and cognitive psychologists. This literature survey on investor rationality with respect to loss aversion, journeys from the classical thought of Expected Utility Theory and into an alternative theory of decision-making under uncertainty, Prospect Theory. However, when applied within the context of the financial market microstructure, the framework proposes an implication that of the Disposition effect. The literature survey shall describe both theories and seek to understand whether losses are able to turn a rational investor into an irrational one.