We conduct an experiment to test whether the size of a loss and the time in a losing position affect investors’ adaptation to the loss situation and, subsequently, whether this adaptation affects future investment decisions. As investors adapt to losses, their neutral reference point shifts...

In this paper we show how the latent Markov model can be used to define different conditions in the stock market, called market-regimes. Changes in regimes can be used to detect financial crises, pinpoint the end of a crisis and predict future developments in the stock market, to some degree....