Loss Aversion in Aggregate Macroeconomic

Prospect theory has been the focus of increasing attention in many flelds of economics. However, it has scarcely been addressed in macroeconomic growth models. 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.