Myopic Loss Aversion or Randomness in Choice? An Experimental Investigation
27 Pages Posted: 7 Oct 2016 Last revised: 12 Feb 2017
Date Written: February 11, 2017
This paper reinterprets a well-known behavioral phenomenon, usually attributed to myopic loss aversion (MLA), through the lens of stochastic choice. First, it is argued that stochastic choice models can explain behavior in prior studies of MLA and reconcile some conflicting results in the literature. Second, the predictions of stochastic choice and MLA are contrasted in a new experiment based on simple choices between gambles and sure amounts. The results of this experiment show subjects to be more risk-averse with frequent feedback if the gamble is attractive, as in Gneezy and Potters (1997), and more risk-seeking with frequent feedback if the gamble is unattractive, as in Haisley et al. (2008). This pattern of results can be rationalized by a random utility or a random parameter model, but not MLA.
Keywords: myopic, loss, aversion, reference, point, random, utility, stochastic, choice
JEL Classification: D81, C91, D01, D03
Suggested Citation: Suggested Citation