Myopic loss aversion, disappointment aversion, and the equity premium puzzle

Livio Stracca and David Fielding

No 203, Working Paper Series from European Central Bank

Abstract: This paper takes a close look at the 'behavioural finance' explanations of the equity premium puzzle, namely myopic loss aversion (Benartzi and Thaler, 1995) and disappointment aversion (Ang, Bekaert and Liu, 2000). The paper proposes a simple specification of loss and disappointment aversion and brings these theories to the data. The main conclusion of the paper is that a highly short-sighted investment horizon is required for the historical equity premium to be explained by loss aversion, while reasonable values for disappointment aversion are found also for long investment horizons. So, stocks may lose only in the short term, but may disappoint also in the long term. JEL Classification: G11, G12

Keywords: disappointment aversion; equity premium puzzle; investment horizon; Myopic loss aversion; reference dependence. (search for similar items in EconPapers)
Date: 2003-01
Note: 335958
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Myopic loss aversion, disappointment aversion, and the equity premium puzzle (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2003203

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