Causes, consequences, and cures of myopic loss aversion -An experimental investigation

Myopic loss aversion (MLA) has been established as one prominentexplanation for the equity premium puzzle. In this paper we address two issuesrelated to the effects of MLA on risky investment decisions. First, we assess therelative impact of feedback frequency and investment flexibility (via theinvestment horizon) on risky investments. Second, given that we observehigher investments with a longer investment horizon, we examine conditionsunder which investors might endogenously opt for a longer investment horizonin order to avoid the negative effects of MLA on investments. We find in ourexperimental study that investment flexibility seems to be at least as relevant asfeedback frequency for the effects of myopic loss aversion. When subjects aregiven the choice to opt for a long or short investment horizon, there is no clearpreference for either. Yet, if subjects face a default horizon (either long orshort), there is rather little switching from the one to the other horizon, showingthat a default might work to attenuate the effects of MLA. However, if subjectsswitch, they are more often willing to switch from the long to the short horizonthan vice versa, suggesting a preference for higher investment flexibility.