Beyond myopia: Wealth accumulation mechanisms and evolving risk behaviors.

Abstract

Conceived as a theoretical explanation for the equity premium puzzle, myopic loss aversion (MLA) explains excessively conservative investment choices through a combination of short-term perspectives (i.e., myopia) and an aversion toward losses. Whereas MLA research has shed light on the mechanisms inducing myopia, which triggers loss aversion, the theory offers limited guidance on evolving risk behaviors. Contributing to the literature, the present effort extends MLA with complementary theoretical perspectives, leading to a richer understanding of the intricacies associated with repeated choices involving risk and uncertainty, such as retirement portfolio management. Drawing on the broader cumulative prospect theory, this article focuses on the moderating role of wealth accumulation mechanism (WAM) on risk behavior trends. Consistent with predictions, three experiments demonstrate that the additive WAM, which prevents reinvestments in subsequent periods, fosters a distinct and repeatable pattern of increasingly riskier behaviors. In contrast, the multiplicative WAM, where payoffs may be reinvested, produces stable or decreasing trends. Whereas novices exhibit stable allocations throughout our simulations, actual retirement plan participants systematically increase allocations to the safe asset as retirement approaches. These results clearly show that factors beyond MLA drive behavioral trends in repeated choice environments, carrying important implications for theory and practice.

Needing everything (or just one thing) to go right: Myopic preferences for consolidating or spreading risks.

“…In other cases, people display what has been called myopia not necessarily because they focus on what is temporally next, but simply because they lose the forest for the individual trees. People display myopic loss aversion (Benartzi & Thaler, 1995) when they think about the risk inherent to how an equity will perform in a single time period instead of internalizing how short-term shocks to valuation will be smoothed over the duration of its holding (Hardin & Looney, 2012; Looney & Hardin, 2020). More generally, decision makers display what Kahneman and Lovallo (1993, p. 22) called “extraordinary myopia” when they partition life’s choices into a set of individually consequential choices instead of a set of decisions that combine to yield an aggregate outcome.…”

Investigating the nonlinear and conditional effects of trust—The new role of institutional contexts in online repurchase

“…According to the theory, a reference point, also known as the current context an individual is exposed to, affects how the individual perceives the decision. It suggests that this decision could differ, often with competing outcomes, depending on how the context is framed within two different perceptual domains (positive or negative) (Hardin & Looney, 2012; Kahneman & Tversky, 1984; Looney & Hardin, 2009; Looney & Hardin, 2020). In a classic life‐saving experiment, individuals positioned themselves in a positive domain if the decision problem highlighted benefits (lives saved) but reversed to a negative domain when the problem was negatively worded (no people will be saved) for the same problem (Tversky & Kahneman, 1981).…”

The Consequences of Narrow Framing for Risk-Taking: A Stress Test of Myopic Loss Aversion

“…Following the relative risk argument by Looney and Hardin (2020), it seems conceivable that risk-taking over longer horizons increases further in linear return conditions, but it does not explain the similar increases in risk-taking in h i g h and l ow over time in the compound return conditions (see Figure B2). Instead, such development could potentially be explained by wealth effects.…”

“…The relatively more cautious investment approach in compound return settings might be attributed to the singular initial endowment. Since relative risk-risky asset investment relative to overall wealth-decreases in linear return conditions for later periods but remains the same in compound return conditions (100%), participants in the former might increase their risky asset allocations throughout the experiment more than participants in the latter (Looney & Hardin, 2020).…”