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Theory and Decision

, Volume 72, Issue 1, pp 35–50 | Cite as

Why does myopia decrease the willingness to invest? Is it myopic loss aversion or myopic loss probability aversion?

  • Stefan Zeisberger
  • Thomas Langer
  • Martin Weber
Article

Abstract

For loss averse investors, a sequence of risky investments looks less attractive if it is evaluated myopically—an effect called myopic loss aversion (MLA). The consequences of this effect have been confirmed in several experiments and its robustness is largely undisputed. The effect’s causes, however, have not been thoroughly examined with regard to one important aspect. Due to the construction of the lotteries that were used in the experiments, none of the studies is able to distinguish between MLA and an explanation based on (myopic) loss probability aversion (MLPA). This distinction is important, however, in discussion of the practical relevance and the generalizability of the phenomenon. We designed an experiment that is able to disentangle lottery attractiveness and loss probabilities. Our analysis reveals that mere loss probabilities are not as important in this dynamic context as previous findings in other domains suggest. The results favor the MLA over the MLPA explanation.

Keywords

Myopic loss aversion Prospect theory Repeated investing Experimental economics 

JEL Classification

D81 G11 

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Copyright information

© Springer Science+Business Media, LLC. 2010

Authors and Affiliations

  • Stefan Zeisberger
    • 1
  • Thomas Langer
    • 1
  • Martin Weber
    • 2
  1. 1.Finance Center MünsterUniversity of MünsterMünsterGermany
  2. 2.Department of Banking and FinanceUniversity of MannheimMannheimGermany

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