The Consequences of Narrow Framing for Risk-Taking: A Stress Test of Myopic Loss Aversion

Management Science (forthcoming)

81 Pages Posted: 16 Feb 2024 Last revised: 16 Apr 2024

See all articles by Rene Schwaiger

Rene Schwaiger

University of Innsbruck - Department of Banking and Finance

Markus Strucks

Radboud University Nijmegen - Institute for Management Research

Stefan Zeisberger

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

Date Written: February 14, 2024

Abstract

Narrow bracketing in combination with loss aversion has been shown to reduce individual risk-taking. This is known as myopic loss aversion (MLA) and has been corroborated by many studies. Recent evidence has contested this notion indicating that MLA's applicability is confined to highly artificial settings. Given the impact of these findings, we reevaluated the evidence on MLA with substantially higher statistical power than in almost all previous studies. We systematically modified the seminal study design by Gneezy and Potters (1997) to include five key adjustments. These involved down-scaled returns, return compounding, and extended investment horizons. Our results --  which are highly robust to analytical heterogeneity -- consistently document the presence of MLA across all experimental conditions.

Keywords: myopic loss aversion, narrow framing, risk-taking, meta science, replication

JEL Classification: D14, D81, G02, G11

Suggested Citation

Schwaiger, Rene and Strucks, Markus and Zeisberger, Stefan, The Consequences of Narrow Framing for Risk-Taking: A Stress Test of Myopic Loss Aversion (February 14, 2024). Management Science (forthcoming), Available at SSRN: https://ssrn.com/abstract=4726856 or http://dx.doi.org/10.2139/ssrn.4726856

Rene Schwaiger

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

Universitätsstraße 15
Innsbruck, 6020
Austria

Markus Strucks

Radboud University Nijmegen - Institute for Management Research ( email )

Nijmegen
Netherlands

Stefan Zeisberger (Contact Author)

Radboud University, Institute for Management Research ( email )

Nijmegen
Netherlands

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

Zürich
Switzerland

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