Optimal Capital Accumulation in a Stochastic Growth Model under Loss Aversion

We compare the optimal capital stock accumulation in a classical Ramsey model with production shocks for a risk neutral expected utility maximizer and a loss averse prospect theory maximizer. It is shown that in the expected utility case the capital stock is on average the same as in the deterministic Ramsey growth model. However, with prospect theory one can expect a capital stock which is higher than in the deterministic Ramsey model and given certain assumptions even higher than Solow's golden-rule capital stock.