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

Pavlo Blavatskyy and Ganna Pogrebna

No 249, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

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 (search for similar items in EconPapers)
JEL-codes: C91 D14 D81 (search for similar items in EconPapers)
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Citations: View citations in EconPapers (6)

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