Relative Loss Aversion and the Cross‐Section of Stock Returns

ABSTRACT Drawing on relative income utility and loss aversion from prospect theory, we investigate whether poor‐performing peer stocks shape investor preferences. Defining 'relief' as the difference between a stock's return and the worst‐performing stock in its industry, we find that high‐relief stocks have lower future returns than low‐relief stocks. This effect strengthens with low relief values, weaker industry performance and greater characteristic similarity to the benchmark. Relief exhibits limited long‐term predictive power and lacks persistence, suggesting the benchmark's relevance is short‐lived. Our findings illustrate the role of positive relative performance comparisons in determining expected returns.