Loss Aversion in Aggregate Macroeconomic Time Series

Prospect theory has found an increasing attention in many fields of economics. However, it has scarcely been addressed in a macroeconomic growth model. In an earlier paper we introduced prospect theory into a stochastic growth model. This paper focuses on linking the Euler equation induced by such a prospect theory growth model to real macroeconomic data. We will follow the approach of Generalized Method of Moments (GMM) estimation to test the implications of a non-linear prospect utility Euler equation. Our results indicate that loss aversion can be traced in aggregate macroeconomic time series.