Mental Accounting, Loss Aversion, and Individual Stock Returns


  • Nicholas Barberis,

  • Ming Huang

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    • University of Chicago Graduate School of Business and NBER, and Stanford University, Graduate School of Business, respectively. We are grateful to Michael Brennan, John Campbell, John Heaton, and Richard Thaler for discussing this paper at various conferences. We have also benefited from conversations with David Hirshleifer, Tano Santos, Andrei Shleifer, Jeremy Stein, and seminar participants at the University of Chicago, Harvard University, Yale University, and the NBER.


We study equilibrium firm-level stock returns in two economies: one in which investors are loss averse over the fluctuations of their stock portfolio, and another in which they are loss averse over the fluctuations of individual stocks that they own. Both approaches can shed light on empirical phenomena, but we find the second approach to be more successful: In that economy, the typical individual stock return has a high mean and excess volatility, and there is a large value premium in the cross section which can, to some extent, be captured by a commonly used multifactor model.