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Why does myopia decrease the willingness to invest? Is it myopic loss aversion or myopic loss probability aversion?


Zeisberger, Stefan; Langer, Thomas; Weber, Martin (2012). Why does myopia decrease the willingness to invest? Is it myopic loss aversion or myopic loss probability aversion? Theory and Decision, 72(1):35-50.

Abstract

For loss averse investors, a sequence of risky investments looks less attractive if it is evaluated myopically—an effect called myopic loss aversion (MLA). The consequences of this effect have been confirmed in several experiments and its robustness is largely undisputed. The effect’s causes, however, have not been thoroughly examined with regard to one important aspect. Due to the construction of the lotteries that were used in the experiments, none of the studies is able to distinguish between MLA and an explanation based on (myopic) loss probability aversion (MLPA). This distinction is important, however, in discussion of the practical relevance and the generalizability of the phenomenon. We designed an experiment that is able to disentangle lottery attractiveness and loss probabilities. Our analysis reveals that mere loss probabilities are not as important in this dynamic context as previous findings in other domains suggest. The results favor the MLA over the MLPA explanation.

Abstract

For loss averse investors, a sequence of risky investments looks less attractive if it is evaluated myopically—an effect called myopic loss aversion (MLA). The consequences of this effect have been confirmed in several experiments and its robustness is largely undisputed. The effect’s causes, however, have not been thoroughly examined with regard to one important aspect. Due to the construction of the lotteries that were used in the experiments, none of the studies is able to distinguish between MLA and an explanation based on (myopic) loss probability aversion (MLPA). This distinction is important, however, in discussion of the practical relevance and the generalizability of the phenomenon. We designed an experiment that is able to disentangle lottery attractiveness and loss probabilities. Our analysis reveals that mere loss probabilities are not as important in this dynamic context as previous findings in other domains suggest. The results favor the MLA over the MLPA explanation.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2012
Deposited On:15 Nov 2010 17:01
Last Modified:05 Apr 2016 14:16
Publisher:Springer
ISSN:0040-5833
Additional Information:The original publication is available at www.springerlink.com
Publisher DOI:https://doi.org/10.1007/s11238-010-9236-1

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