Myopic loss aversion and market experience

Mayhew, Brian W.; Vitalis, Adam

doi:10.1016/j.jebo.2013.10.007

Cited by 9 publications

(4 citation statements)

References 25 publications

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“…In fact, while Haigh and List (2005) find that professional traders still exhibit behavior consistent with myopic loss aversion (MLA), Feng and Seasholes (2005) show that sophistication and trading experience eliminate investors' reluctance to realize losses, though not their propensity to realize gains. Mayhew and Vitalis (2014) adapt a lab experiment by Gneezy, Kapteyn, and Potters (2003) and find that the MLA effect is all but eliminated by market experience, although their results do not transfer to other settings. List (2004) uses an artefactual field experiment to show that loss aversion adequately organizes behavior among inexperienced consumers, but consumers with intense market experience behave largely in accordance with neoclassical predictions, failing to exhibit a significant overweighting of losses.…”

Section: Introductionmentioning

confidence: 91%

Does Market Experience Attenuate Risk Aversion? Evidence from Landed Farm Households in Ethiopia

Melesse

Cecchi

2017

World Development

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Risk preferences are important drivers of many relevant economic decisions of farm households. High risk aversion is a well-known trigger of ''poverty traps" for farm households in developing countries. This paper analyzes the effect of market experience on risk aversion for a relatively large sample of landed farm households characterized by historically low mobility in Ethiopia. We measure risk aversion using lab-in-field experimental data, and relate it to actual market experience of household heads. We use an instrumental variable approach to address the issue of endogeneity due to possible self-selection into trade. We find that market experience attenuates risk aversion--farm households with greater market experience are more risk tolerant. Results are robust to using several alternative specifications, controlling for internal mobility, out-migration and other potential unobservables, and for violations to rational choice. Overall, this study provides strong empirical evidence that risk preferences endogenously change as a result of market experience, and can help design policies aiming to increase the productivity and efficiency of farm households.

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Section: Introductionmentioning

confidence: 91%

Does Market Experience Attenuate Risk Aversion? Evidence from Landed Farm Households in Ethiopia

Melesse

Cecchi

2017

World Development

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“…Thus, each outcome contributes independently to wealth. Fewer studies implement the multiplicative WAM (Langer & Weber, 2008; Looney & Hardin, 2009; Mayhew & Vitalis, 2014), which endows participants with a lump sum at the beginning of the series. Wealth compounds multiplicatively as participants may reinvest payoffs.…”

Section: Theoretical Backgroundmentioning

confidence: 99%

“…Consistent with prior operationalizations (Langer & Weber, 2008; Looney & Hardin, 2009; Mayhew & Vitalis, 2014), participants assigned to the multiplicative condition received an endowment of $90,000 at the beginning of the simulation 4 . No additional endowments were issued.…”

Section: Study 1: Initial Test Using Novice Participantsmentioning

confidence: 99%

Beyond myopia: Wealth accumulation mechanisms and evolving risk behaviors.

Looney

Hardin

2020

Decision

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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.

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“…The power of market forces to alleviate the effect of MLA, for example, has been examined, but with no clear effect. In Gneezy et al (2003) markets fail to overcome MLA, while in Mayhew and Vitalis (2014) there is some evidence of such an effect when experienced participants trade in a market. It is not clear, however, whether this is due to market forces or participants learning individually to overcome MLA.…”

Section: Equity Risk Premiummentioning

confidence: 99%

Behavioral finance: insights from experiments I: theory and financial markets

Duxbury

2015

Review of Behavioral Finance

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Newcastle University ePrints -eprint.ncl.ac.uk Duxbury D. Behavioral finance: insights from experiments I: theory and financial markets. Review of Behavioral Finance 2015, 7(1), 78-96. Abstract PurposeThe aim, here and in a companion paper (Duxbury, 2015), is to review the insights provided by experimental studies examining financial decisions and market behaviour. Design/methodology/approachFocus is directed on those studies examining explicitly, or with direct implications for, the most robustly identified phenomena or stylized facts observed in behavioral finance. The themes for this first paper are theory and financial markets. FindingsExperiments complement the findings from empirical studies in behavioral finance by avoiding some of the limitations or assumptions implicit in such studies. Originality/valueWe synthesize the valuable contribution made by experimental studies in extending our knowledge of the functioning of financial markets and the financial behavior of individuals.

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Myopic loss aversion and market experience

Cited by 9 publications

References 25 publications

Does Market Experience Attenuate Risk Aversion? Evidence from Landed Farm Households in Ethiopia

Does Market Experience Attenuate Risk Aversion? Evidence from Landed Farm Households in Ethiopia

Beyond myopia: Wealth accumulation mechanisms and evolving risk behaviors.

Behavioral finance: insights from experiments I: theory and financial markets

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