Why Does Myopia Decrease the Willingness to Invest? Is it Myopic Loss Aversion or Myopic Loss Probability Aversion?

21 Pages Posted: 11 Nov 2009 Last revised: 28 Nov 2011

See all articles by Stefan Zeisberger

Stefan Zeisberger

Radboud University, Institute for Management Research; University of Zurich, Department of Banking and Finance

Thomas Langer

University of Muenster - Finance Center

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: September 21, 2010

Abstract

For loss averse investors, a sequence of risky investments looks less attractive if it is evaluated myopically — an effect called myopic loss aversion (MLA). The consequences of this effect have been confirmed in several experiments and its robustness is largely undisputed. The effect’s causes, however, have not been thoroughly examined with regard to one important aspect. Due to the construction of the lotteries that were used in the experiments, none of the studies is able to distinguish between MLA and an explanation based on (myopic) loss probability aversion (MLPA). This distinction is important, however, in discussion of the practical relevance and the generalizability of the phenomenon. We designed an experiment that is able to disentangle lottery attractiveness and loss probabilities. Our analysis reveals that mere loss probabilities are not as important in this dynamic context as previous findings in other domains suggest. The results favor the MLA over the MLPA explanation.

Keywords: myopic loss aversion, Prospect Theory, repeated investing, experimental economics

JEL Classification: D81, G11

Suggested Citation

Zeisberger, Stefan and Langer, Thomas and Weber, Martin, Why Does Myopia Decrease the Willingness to Invest? Is it Myopic Loss Aversion or Myopic Loss Probability Aversion? (September 21, 2010). Theory and Decision, Vol. 72, pp, 35-50, 2012, Available at SSRN: https://ssrn.com/abstract=1503463

Stefan Zeisberger (Contact Author)

Radboud University, Institute for Management Research ( email )

Nijmegen
Netherlands

University of Zurich, Department of Banking and Finance ( email )

Zürich
Switzerland

Thomas Langer

University of Muenster - Finance Center ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 22033 (Phone)

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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