Loss aversion in a consumption-savings model

We propose a model of consumption and saving based on Kahneman and Tversky' s Prospect Theory that implies a fundamental asymmetry in consumption behav ior inconsistent with other models of consumption. When there is sufficient income uncertainty, a person resists lowering consumption in response to b ad news about future income. This resistance is greater than the resistance to increasing consumption in response to good news. We present empirical e vidence from five countries that confirms this behavior. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: A12; B49; C91; D11; D 81; E21.