Psychological and environmental determinants of myopic loss aversion

  • Astrid Hopfensitz Astrid Hopfensitz
  • Tanja Wranik Tanja Wranik

Each economic actor is characterized by his own evaluations, traits, and strategies. Although heterogeneity of economic actors is widely acknowledged, little is known about the factors causing it. In this paper, we will examine the behavioral bias known as myopic loss aversion, and the environmental and psychological factors leading to different behavioral reactions. Myopic loss aversion has been used to suggest that fund managers should reveal information only rarely,to lead investors to choose options with (on average) higher returns.Specifically, we experimentally studied the impact of experience, individual differences, and emotions on behavioral responses to feedback frequency in an investment setting. Participantsmade investment decisions in one of three feedback frequency conditions: (1) they received feedback after each round and had the opportunity to make investment changes each time; (2) they received feedback after each round, but were only given the possibility to make changes every three rounds; and (3) they received aggregated feedback every three rounds, and also had the opportunity to make changes every three rounds. We collected information about personalityand individual difference factors before the experiment. Finally, evaluations and emotions were measured every three rounds, immediately after feedback was given. We hypothesized that myopic loss aversion is not a general phenomenon, but that stableindividual differences lead to different evaluations and emotional reactions concerning feedback.This implies that myopic loss aversion will only be present for some groups of people under certain conditions. As predicted, we found that myopic loss aversion is not generally observed; rather, we found both an experience effect and a personality effect. In particular, myopic loss aversion was particularly likely: (1) when initial investment rounds lead to negative investment experiences (i.e., losses); and (2) for investors with low self-efficacy concerning the investment situation. ?Self efficacy” is related to a personality profile characterized by confidence in decision-making abilities, high optimism, and low anxiety. Our results may help explain whichindividual and situational factors lead to myopic loss aversion, and should help researchers and practitioners provide optimal feedback to different types of investment clients.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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