Myopic Loss Aversion Revisited: the Effect of Probability Distortions in Choice Under Risk

IEW Working Paper No. 249

21 Pages Posted: 19 Feb 2007

See all articles by Pavlo R. Blavatskyy

Pavlo R. Blavatskyy

Montpellier Business School

Ganna Pogrebna

Columbia University

Date Written: December 2006

Abstract

When the performance of a risky asset is frequently assessed, the probability of detecting a loss is high, which averts the loss averse investors. This effect is known as myopic loss aversion (MLA). This paper reexamines several recent experimental studies documenting the existence of MLA. A closer look at the experimental data reveals that the effect of MLA is largely neutralized by the overweighting of small probabilities and the underweighting of moderate and high probabilities. Remarkably, the two effects exactly balance each other out for conventional parameterizations of cumulative prospect theory. MLA alone cannot explain the observed investment decisions.

Keywords: Myopic loss aversion, experiment, probability weight, prospect theory

JEL Classification: D81, C91, D14

Suggested Citation

Blavatskyy, Pavlo R. and Pogrebna, Ganna, Myopic Loss Aversion Revisited: the Effect of Probability Distortions in Choice Under Risk (December 2006). IEW Working Paper No. 249. Available at SSRN: https://ssrn.com/abstract=754644 or http://dx.doi.org/10.2139/ssrn.754644

Pavlo R. Blavatskyy (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Ganna Pogrebna

Columbia University ( email )

419 Schermerhorn Hall
New York, NY 10027
United States

HOME PAGE: http://www.gannapogrebna.com

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