Myopic Loss Aversion or Randomness in Choice? An Experimental Investigation

27 Pages Posted: 7 Oct 2016 Last revised: 12 Feb 2017

Piotr Evdokimov

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Investigacion Economica

Date Written: February 11, 2017

Abstract

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

Evdokimov, Piotr, Myopic Loss Aversion or Randomness in Choice? An Experimental Investigation (February 11, 2017). Available at SSRN: https://ssrn.com/abstract=2849067

Piotr Evdokimov (Contact Author)

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Investigacion Economica ( email )

Av. Camino a Santa Teresa #930
Col. Heroes de Padierna
Mexico City, D.F. 10370
Mexico

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