Description:
This study investigates the empirical evidence of the salience effect provided by Cosemans and Frehen (2021). In this paper, we find that the salience effect is reference-dependent. Salience effect is strongly significant among stock groups with previous capital losses regardless of the weighting scheme applied. We explain our results using the framework of reference-dependent preferences: among previous losses, investors tend to break-even and engage in risk-loving behavior. After experiencing a loss, average investors prefer high-salient stocks to low-salient stocks, which leads to a significant salience effect. Furthermore, our finding is pronounced among stocks with low institutional ownership, consistent with individual investors’ behavior of mental accounting and reference-dependence preference together with the salience theory