Risk aversion in the stock market

Risk aversion is a very prevalent topic as it relates to economic issues of the day. Particularly evident is people’s tendency to be risk averse in the stock market. In mid-November, the stock market woes were described in “Stocks Are Hurt by Latest Fear: Declining Prices” (http://www.nytimes.com/2008/11/20/business/economy/20econ.html?scp=1&sq=fear%20in%20the%20market&st=cse). Stocks fell to their lowest point in nearly six years on November 19th. Part of the decline in stock prices is simply caused by fear in the market. People fear that all of their assets are plummeting to zero and sell while they can, even though this practice of selling low usually will hurt in the long run. It is an indication of the risk-averse nature of the average person. Studies by Tversky and Kahneman, for example, show that people’s answers to a problem tend to be risk-averse even only the wording is changed.