We study equilibrium trading strategies and market quality in an economy in which
speculators display preferences consistent with Prospect Theory (Kahneman and
Tversky,[39]; Tversky and Kahneman,[63]), ie, loss aversion and mild risk seeking in losses.
Loss aversion (risk seeking in losses) induces speculators to trade less (more), and less
cautiously (more aggressively), with their private information–but also makes them less
(more) inclined to purchase private information when it is costly–in order to mitigate …