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Myopic Loss Aversion Revisited: The Effect of Probability Distortions in Choice Under Risk

Author

Listed:
  • Pavlo Blavatskyy
  • Ganna Pogrebna

Abstract

When the performance of a risky asset is frequently assessed, the probability of detecting a loss is high, which averts the loss averse investors. This effect is known as myopic loss aversion (MLA). This paper reexamines several recent experimental studies documenting the existence of MLA. A closer look at the experimental data reveals that the effect of MLA is largely neutralized by the overweighting of small probabilities and the underweighting of moderate and high probabilities. Remarkably, the two effects exactly balance each other out for conventional parameterizations of cumulative prospect theory. MLA alone cannot explain the observed investment decisions.

Suggested Citation

  • Pavlo Blavatskyy & Ganna Pogrebna, "undated". "Myopic Loss Aversion Revisited: The Effect of Probability Distortions in Choice Under Risk," IEW - Working Papers 249, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:249
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    File URL: https://www.econ.uzh.ch/apps/workingpapers/wp/iewwp249.pdf
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    Citations

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    Cited by:

    1. Iñigo Iturbe-Ormaetxe & Giovanni Ponti & Josefa Tomás, 2016. "Myopic Loss Aversion under Ambiguity and Gender Effects," PLOS ONE, Public Library of Science, vol. 11(12), pages 1-11, December.
    2. Jose Luiz Barros Fernandes & Juan Ignacio Pena & Benjamin Miranda Tabak, 2010. "Behaviour finance and estimation risk in stochastic portfolio optimization," Applied Financial Economics, Taylor & Francis Journals, vol. 20(9), pages 719-738.
    3. Hopfensitz, Astrid, 2009. "Previous Outcomes and Reference Dependence: A Meta Study of Repeated Investment Tasks with Restricted Feedback," TSE Working Papers 09-087, Toulouse School of Economics (TSE).
    4. Mattos, Fabio & Garcia, Philip & Pennings, Joost M.E., 2008. "Dynamic Decision Making in Agricultural Futures and Options Markets," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37605, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    5. Mattos, Fabio & Garcia, Philip, 2009. "The Effect of Prior Gains and Losses on Current Risk-Taking Using Quantile Regression," 2009 Conference, April 20-21, 2009, St. Louis, Missouri 53035, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    6. Mattos, Fabio & Garcia, Philip & Pennings, Joost M.E., 2008. "Probability weighting and loss aversion in futures hedging," Journal of Financial Markets, Elsevier, vol. 11(4), pages 433-452, November.

    More about this item

    Keywords

    myopic loss aversion; experiment; probability weight; prospect theory;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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