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
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: Suggested Citation