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Causes, consequences, and cures of myopic loss aversion - An experimental investigation

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Author Info
Gerlinde Fellner
Matthias Sutter

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Abstract

Myopic loss aversion (MLA) has been established as one prominent explanation for the equity premium puzzle. In this paper we address two issues related to the effects of MLA on risky investment decisions. First, we assess the relative impact of feedback frequency and investment flexibility (via the investment horizon) on risky investments. Second, given that we observe higher investments with a longer investment horizon, we examine conditions under which investors might endogenously opt for a longer investment horizon in order to avoid the negative effects of MLA on investments. We find in our experimental study that investment flexibility seems to be at least as relevant as feedback frequency for the effects of myopic loss aversion. When subjects are given the choice to opt for a long or short investment horizon, there is no clear preference for either. Yet, if subjects face a default horizon (either long or short), there is rather little switching from the one to the other horizon, showing that a default might work to attenuate the effects of MLA. However, if subjects switch, they are more often willing to switch from the long to the short horizon than vice versa, suggesting a preference for higher investment flexibility.

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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse16_2005.

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Length: 24
Date of creation: Jul 2005
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Handle: RePEc:bon:bonedp:bgse16_2005

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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Related research
Keywords: loss aversion; risk; investment; experiment;

Other versions of this item:

Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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