Investors are so traumatized by getting scammed that they won't touch the stock market unless they expect a 15% higher return than normal.
SSRN · March 13, 2026 · 6304779
Why it matters
Standard finance assumes a dollar lost is a dollar lost. This paper proves 'fraud aversion' is a distinct psychological force: losing money to a scam causes significantly more distress than losing the same amount to a market crash, explaining why many people stay out of the stock market entirely despite high average returns.
From the abstract
Standard models assume the source of financial loss does not affect investor utility. We challenge this assumption by showing that losses due to fraud are perceived as more distressing than equivalent losses caused by poor performance or external shocks-a phenomenon we term fraud aversion. We formalize this by nesting the seminal framework of Guiso et al. (2008) within a utility model incorporating nonpecuniary disutility from deception. Using survey evidence, we calibrate this model to quantify