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Psychological and environmental determinants of myopic loss aversion

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  • Hopfensitz, Astrid
  • Wranik, Tanja

Abstract

Each economic actor is characterized by his own evaluations, traits, and strategies. Although heterogeneity of economic actors is widely acknowledged, little is known about the factors causing it. In this paper, we will examine the behavioral bias known as myopic loss aversion, and the environmental and psychological factors leading to different behavioral reactions. Myopic loss aversion has been used to suggest that fund managers should reveal information only rarely, to lead investors to choose options with (on average) higher returns. Specifically, we experimentally studied the impact of experience, individual differences, and emotions on behavioral responses to feedback frequency in an investment setting. Participants made investment decisions in one of three feedback frequency conditions: (1) they received feedback after each round and had the opportunity to make investment changes each time; (2) they received feedback after each round, but were only given the possibility to make changes every three rounds; and (3) they received aggregated feedback every three rounds, and also had the opportunity to make changes every three rounds. We collected information about personality and individual difference factors before the experiment. Finally, evaluations and emotions were measured every three rounds, immediately after feedback was given. We hypothesized that myopic loss aversion is not a general phenomenon, but that stable individual differences lead to different evaluations and emotional reactions concerning feedback. This implies that myopic loss aversion will only be present for some groups of people under certain conditions. As predicted, we found that myopic loss aversion is not generally observed; rather, we found both an experience effect and a personality effect. In particular, myopic loss aversion was particularly likely: (1) when initial investment rounds lead to negative investment experiences (i.e., losses); and (2) for investors with low self-efficacy concerning the investment situation. ‘Self efficacy’ is related to a personality profile characterized by confidence in decision-making abilities, high optimism, and low anxiety. Our results may help explain which individual and situational factors lead to myopic loss aversion, and should help researchers and practitioners provide optimal feedback to different types of investment clients.

Suggested Citation

  • Hopfensitz, Astrid & Wranik, Tanja, 2008. "Psychological and environmental determinants of myopic loss aversion," MPRA Paper 9305, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:9305
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Stefan Zeisberger & Thomas Langer & Martin Weber, 2012. "Why does myopia decrease the willingness to invest? Is it myopic loss aversion or myopic loss probability aversion?," Theory and Decision, Springer, vol. 72(1), pages 35-50, January.
    2. Olaf Hübler, 2013. "Are Tall People Less Risk Averse Than Others?," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 133(1), pages 23-42.
    3. Hopfensitz, Astrid & Wranik, Tanja, 2009. "How to Adapt to Changing Markets: Experience and Personality in a Repeated Investment Game," TSE Working Papers 09-122, Toulouse School of Economics (TSE).
    4. van der Heijden, Eline & Klein, Tobias J. & Müller, Wieland & Potters, Jan, 2012. "Framing effects and impatience: Evidence from a large scale experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 701-711.
    5. 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.
    6. 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).
    7. Wieland Mueller & Eline van der Heijden & Tobias J. Klein & Jan Potters, 2011. "Nudges and Impatience: Evidence from a Large Scale Experiment," Vienna Economics Papers 1110, University of Vienna, Department of Economics.

    More about this item

    Keywords

    myopic loss aversion; risk taking; character traits; self efficacy; emotions; personality;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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