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Risk Aversion or Myopia? Choices in Repeated Gambles and Retirement Investments

  • Shlomo Benartzi

    (The Anderson School, 110 Westwood Plaza, University of California at Los Angeles, Los Angeles, California 90095-1481)

  • Richard H. Thaler

    (Graduate School of Business, University of Chicago, 1101 E. 58th St., Chicago, Illinois 60637)

We study how decision makers choose when faced with multiple plays of a gamble or investment. When evaluating multiple plays of a simple mixed gamble, a chance to win x or lose y, subjects show a sensitivity to the amount to lose on a single trial, holding the distribution of returns for the portfolio constant; that is, they display "myopic loss aversion." Many subjects who decline multiple plays of such a gamble will accept it when shown the resulting distribution. This analysis is applied to the problem of retirement investing. We show that workers invest more of their retirement savings in stocks if they are shown long-term (rather than one-year) rates of return.

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File URL: http://dx.doi.org/10.1287/mnsc.45.3.364
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 45 (1999)
Issue (Month): 3 (March)
Pages: 364-381

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Handle: RePEc:inm:ormnsc:v:45:y:1999:i:3:p:364-381
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  1. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
  2. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  3. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
  4. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
  5. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
  6. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
  7. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  8. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 73-92.
  9. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  10. Christian Gollier, 1996. "Repeated Optional Gambles and Risk Aversion," Management Science, INFORMS, vol. 42(11), pages 1524-1530, November.
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