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Do financial advisors exhibit myopic loss aversion?

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  • Kristoffer Eriksen

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  • Ola Kvaløy

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Abstract

Myopic loss aversion (MLA) has been proposed as an explanation for the equity premium puzzle, and a number of experiments on students indicate that people do exhibit MLA. However, many people do not rely on their own judgment when making investment decisions, but obtain help from financial investment advisors on how to allocate their wealth. The preferences and choices of financial advisors are thus important for understanding investment behavior. In this paper we make use of 50 professional financial advisors to examine whether they exhibit behavior consistent with MLA. Indeed, we find that they behave consistently with MLA to a larger extent than students. Copyright Swiss Society for Financial Market Research 2010

Suggested Citation

  • Kristoffer Eriksen & Ola Kvaløy, 2010. "Do financial advisors exhibit myopic loss aversion?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 24(2), pages 159-170, June.
  • Handle: RePEc:kap:fmktpm:v:24:y:2010:i:2:p:159-170
    DOI: 10.1007/s11408-009-0124-z
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    References listed on IDEAS

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    1. Michael S. Haigh & John A. List, 2005. "Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis," Journal of Finance, American Finance Association, vol. 60(1), pages 523-534, February.
    2. 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.
    3. Gerlinde Fellner & Matthias Sutter, 2009. "Causes, Consequences, and Cures of Myopic Loss Aversion - An Experimental Investigation," Economic Journal, Royal Economic Society, vol. 119(537), pages 900-916, April.
    4. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
    5. Alexander, Gordon J. & Jones, Jonathan D. & Nigro, Peter J., 1998. "Mutual fund shareholders: characteristics, investor knowledge, and sources of information," Financial Services Review, Elsevier, vol. 7(4), pages 301-316.
    6. John A. List, 2004. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," Econometrica, Econometric Society, vol. 72(2), pages 615-625, March.
    7. John A. List, 2002. "Preference Reversals of a Different Kind: The "More Is Less" Phenomenon," American Economic Review, American Economic Association, vol. 92(5), pages 1636-1643, December.
    8. Jeremy J. Siegel & Richard H. Thaler, 1997. "Anomalies: The Equity Premium Puzzle," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 191-200, Winter.
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    Citations

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    Cited by:

    1. Eriksen, Kristoffer W. & Kvaløy, Ola, 2014. "Myopic risk-taking in tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 97(C), pages 37-46.
    2. Ertac, Seda & Gurdal, Mehmet Y., 2012. "Deciding to decide: Gender, leadership and risk-taking in groups," Journal of Economic Behavior & Organization, Elsevier, vol. 83(1), pages 24-30.
    3. Lee, Boram & Veld-Merkoulova, Yulia, 2016. "Myopic loss aversion and stock investments: An empirical study of private investors," Journal of Banking & Finance, Elsevier, vol. 70(C), pages 235-246.
    4. Matteo Del Vigna, 2011. "Market equilibrium with heterogeneous behavioural and classical investors' preferences," Working Papers - Mathematical Economics 2011-09, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    5. Mayhew, Brian W. & Vitalis, Adam, 2014. "Myopic loss aversion and market experience," Journal of Economic Behavior & Organization, Elsevier, vol. 97(C), pages 113-125.
    6. Martin Wallmeier, 2011. "Beyond payoff diagrams: how to present risk and return characteristics of structured products," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 25(3), pages 313-338, September.
    7. Trautmann, Stefan T. & Zeckhauser, Richard J., 2013. "Shunning uncertainty: The neglect of learning opportunities," Games and Economic Behavior, Elsevier, vol. 79(C), pages 44-55.
    8. Glätzle-Rützler, Daniela & Sutter, Matthias & Zeileis, Achim, 2015. "No myopic loss aversion in adolescents? – An experimental note," Journal of Economic Behavior & Organization, Elsevier, vol. 111(C), pages 169-176.
    9. Daniela Gl�tzle-R�tzler & Matthias Sutter & Achim Zeileis, 2013. "No myopic loss aversion in adolescents? � An experimental note," Working Papers 2013-07, Faculty of Economics and Statistics, University of Innsbruck.

    More about this item

    Keywords

    Myopic loss aversion; Experiment; C91; D81; G11;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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