This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Causes, consequences, and cures of myopic loss aversion - An experimental investigation

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Gerlinde Fellner (University of Bonn, Department of Economics, Adenauerallee 24-42, 53113 Bonn. fellner@uni-bonn.de)
Matthias Sutter (University of Innsbruck and Max Planck Institute for Economics Jena)

Additional information is available for the following registered author(s):

Abstract

Myopic loss aversion (MLA) has been established as one prominent explanation for the equity premium puzzle. In this paper we address two issues related to the effects of MLA on risky investment decisions. First, we assess the relative impact of feedback frequency and investment flexibility (via the investment horizon) on risky investments. Second, given that we observe higher investments with a longer investment horizon, we examine conditions under which investors might endogenously opt for a longer investment horizon in order to avoid the negative effects of MLA on investments. We find in our experimental study that investment flexibility seems to be at least as relevant as feedback frequency for the effects of myopic loss aversion. When subjects are given the choice to opt for a long or short investment horizon, there is no clear preference for either. Yet, if subjects face a default horizon (either long or short), there is rather little switching from the one to the other horizon, showing that a default might work to attenuate the effects of MLA. However, if subjects switch, they are more often willing to switch from the long to the short horizon than vice versa, suggesting a preference for higher investment flexibility.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sfbtr15.de/dipa/171.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 171.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:trf:wpaper:171

Contact details of provider:
Postal: D-68131 Mannheim
Fax: +49 621 181-2785
Email:
Web page: http://www.sfbtr15.de/
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Claudia Jung).

Related research
Keywords: loss aversion; risk; investment; experiment;

Other versions of this item:

Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Sendhil Mullainathan & Richard H. Thaler, 2000. "Behavioral Economics," NBER Working Papers 7948, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Thomas Grandner, 1998. "Market Shares of Price Setting Firms and Trade Unions," Department of Economics Working Papers wuwp061, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  3. Sutter, Matthias, 2007. "Are teams prone to myopic loss aversion? An experimental study on individual versus team investment behavior," Economics Letters, Elsevier, vol. 97(2), pages 128-132, November. [Downloadable!] (restricted)
  4. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  5. Kocher, Martin G. & Luptacik, Mikulas & Sutter, Matthias, 2006. "Measuring productivity of research in economics: A cross-country study using DEA," Socio-Economic Planning Sciences, Elsevier, vol. 40(4), pages 314-332, December. [Downloadable!] (restricted)
    Other versions:
  6. Thomas Grandner, 2000. "A Note on Unionized Firms' Incentive to Integrate Vertically," Department of Economics Working Papers wuwp070, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  7. Engelbert Stockhammer, 1999. "Robinsonian and Kaleckian Growth. An Update on Post-Keynesian Growth Theories," Department of Economics Working Papers wuwp067, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  8. Arne Heise, 2000. "Theorie optimaler Lohnräume. Zur Lohnpolitik in der Europäischen Währungsunion," Department of Economics Working Papers wuwp073, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  9. Pasquale Commedatore & Ingrid Kubin, 2003. "The dynamics of wages and employment in a model of monopolistic competition and efficient bargaining," Department of Economics Working Papers wuwp085, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
    Other versions:
  10. Christian Ragacs & Martin Zagler, 1997. "Economic Policy in a Model of Endogenous Growth," Department of Economics Working Papers wuwp053, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  11. Dieter Gstach, 2003. "A Statistical Framework for Estimating Output-Specific Efficiencies," Department of Economics Working Papers wuwp083, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  12. Pavlo Blavatsky, 2003. "Note on "Small Feedback-based Decisions and Their Limited Correspondence to Description-based Decisions"," CERGE-EI Working Papers wp218, The Center for Economic Research and Graduate Education - Economic Institute, Prague. [Downloadable!]
  13. Fabio Rumler, 1999. "Computable General Equilibrium Modeling, Numerical Simulations in a 2-Country Monetary General Equilibrium Model," Department of Economics Working Papers wuwp065, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  14. Leopold Soegner, 1998. "Regulation of a Complementary Imputed Good in a Competitive Environment," Department of Economics Working Papers wuwp056, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  15. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March. [Downloadable!] (restricted)
  16. Thomas Grandner, 2007. "Product differentiation in a linear city and wage bargaining," Department of Economics Working Papers wuwp109, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  17. Bellemare, C. & Krause, M. & Kroger, S. & Zhang, C., 2004. "Myopic loss aversion : information feedback vs. investment flexibility," Discussion Paper 32, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  18. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "For Better or For Worse: Default Effects and 401(k) Savings Behavior," NBER Working Papers 8651, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  19. Gerhard Munduch & Alexander Pfister & Leopold Sögner & Alfred Stiassny, 2002. "Estimating Marginal Costs for the Austrian Railway System," Department of Economics Working Papers wuwp078, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  20. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  21. Thaler, Richard H, et al, 1997. "The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 647-61, May.
  22. Christian Bellak, 2000. "The Investment Development Path of Austria," Department of Economics Working Papers wuwp075, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  23. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February. [Downloadable!] (restricted)
    Other versions:
  24. Dieter Gstach & Thomas Grandner, 1998. "Restricted Immigration in a Two-Sector Economy," Department of Economics Working Papers wuwp055, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  25. Christian Bellak, 1999. "Explaining Foreign Ownership By Comparative and Competitive Advantage: Empirical Evidence," Department of Economics Working Papers wuwp062, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  26. Özlem Onaran, 2007. "International financial markets and fragility in the Eastern Europe: "can it happen" here?," Department of Economics Working Papers wuwp108, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  27. Dieter Gstach, 1998. "Technical Efficiency in Noisy Multi-Output Settings," Department of Economics Working Papers wuwp059, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  28. Christian Ragacs & Thomas Steinberger & Martin Zagler, 1998. "Growth Theories and the Persistence of Output Fluctuations: The Case of Austria," Department of Economics Working Papers wuwp060, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  29. Dieter Gstach, 1996. "A new approach to stochastic frontier estimation: DEA+," Department of Economics Working Papers wuwp039, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  30. Martin Zagler, 1999. "Endogenous Growth, Efficency Wages, and Persistent Unemployment," Department of Economics Working Papers wuwp066, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  31. Gneezy, Uri & Potters, Jan, 1997. "An Experiment on Risk Taking and Evaluation Periods," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 631-45, May.
  32. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2003. "Optimal Defaults," American Economic Review, American Economic Association, vol. 93(2), pages 180-185, May. [Downloadable!]
  33. Uri Gneezy & Arie Kapteyn & Jan Potters, 2003. "Evaluation Periods and Asset Prices in a Market Experiment," Journal of Finance, American Finance Association, vol. 58(2), pages 821-838, 04. [Downloadable!] (restricted)
    Other versions:
  34. Dieter Gstach & Andrew Somers & Susanne Warning, 2003. "Output specific efficiencies: The case of UK private secondary schools," Department of Economics Working Papers wuwp084, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  35. Bernhard Mahlberg & Thomas Url, . "Effects of the Single Market on the Austrian Insurance Industry," WIFO Working Papers 97, WIFO. [Downloadable!]
  36. Engelbert Stockhammer, 2000. "Explaining European Unemployment: Testing the NAIRU Theory and a Keynesian Approach," Department of Economics Working Papers wuwp068, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  37. Thomas Grandner, 1997. "Territoriale Evolution von Kooperation in einem Gefangenendilemma," Department of Economics Working Papers wuwp045, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  38. Arne Heise, 2001. "Das Konzept einer nachhaltigen Finanzpolitik aus heterodoxer Sicht - ein Diskussionsbeitrag," Department of Economics Working Papers wuwp076, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  39. Dr. Peter Kenning & Hilke Plassmann, 2004. "NeuroEconomics," Experimental 0412005, EconWPA. [Downloadable!]
  40. Charles T. Clotfelter & Philip J. Cook, 1991. "The "Gambler's Fallacy" in Lottery Play," NBER Working Papers 3769, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  41. Gert Wehinger, 1997. "Exchange Rate-Based Stabilization: Pleasant Monetary Dynamics?," Department of Economics Working Papers wuwp050, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  42. Arne Heise, 2000. "Postkeynesianische Beschäftigungstheorie. Einige Prinzipielle Überlegungen," Department of Economics Working Papers wuwp072, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  43. Martin Zagler, 1996. "Long-Run Monetary Non-Neutrality in a Model of Endogenous Growth," Department of Economics Working Papers wuwp037, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  44. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hopfensitz, Astrid, 2009. "Previous outcomes and reference dependence: A meta study of repeated investment tasks with and without restricted feedback," MPRA Paper 16096, University Library of Munich, Germany. [Downloadable!]
Statistics
Access and download statistics

Did you know? IDEAS was launched in September 1997.

This page was last updated on 2009-11-20.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.