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Strategies & Market Trends : Waiting for the big Kahuna
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To: William H Huebl who wrote (58662)7/15/2002 2:36:24 PM
From: Harvey Allen  Read Replies (1) of 94695
 
The American consumer remains at the top of my worry list in this post-bubble era. The reason -- the perils of what I have called the "asymmetrical wealth effect." This rests on the basic precepts of behavioral finance set forth over 30 years ago by Amos Tversky, a renowned Stanford University psychologist. Through experimental sampling of investor responses to hypothetical and actual financial market situations, Tversky found that the loss aversion motive of individual investors made them far more sensitive to reductions in wealth than to increases in their portfolios. The caveat came in what Tversky called "prospect theory" -- that investor responses are also influenced by recent performance. Individuals that only lose "house money" are less inclined to alter their fundamental economic behavior. Conversely, once the accumulation of losses taps into original investor principal, it’s a different matter altogether.

morganstanley.com
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