Myopic Loss Aversion

[Gareth]

I find the core reading definition very ambiguous:

"Research suggests that investors are less risk-averse when faced with a multi-period series of gambles and that the frequency of choice / length of reporting period will also be influential."

Maybe I don't interpret "multi-period" correctly, but this statement to me implies that an investor given lots of short term bets rolling over time will be less risk averse.

This compares to the original definition by Benartzi and Thaler:

"...economic agents are averse to losses at an irrationally short horizon, due to institutional reasons or because they are affected by a behavioural bias (in particular because they are too anxious to evaluate the performance of their portfolio on a short term basis"

which is the opposite to my interpretation of the IoA version. Clearly the 2nd is correct and matches the ActEd questions on this topic.

Did anyone else find this bit of core reading confusing?

 

[olly]

I find the core reading definition very ambiguous:

"Research suggests that investors are less risk-averse when faced with a multi-period series of gambles and that the frequency of choice / length of reporting period will also be influential."

Maybe I don't interpret "multi-period" correctly, but this statement to me implies that an investor given lots of short term bets rolling over time will be less risk averse.

This compares to the original definition by Benartzi and Thaler:

"...economic agents are averse to losses at an irrationally short horizon, due to institutional reasons or because they are affected by a behavioural bias (in particular because they are too anxious to evaluate the performance of their portfolio on a short term basis"

which is the opposite to my interpretation of the IoA version. Clearly the 2nd is correct and matches the ActEd questions on this topic.

Did anyone else find this bit of core reading confusing?

I think Gareth, you have to read the first bit in the context that they are less risk averse when it is a multi period situation rather than a single period situation, (ignoring for a moment the length of the period). i.e. focus on the pharse "series of gambles". Without having it to hand I think the rest of the page backs this up. I would agree however that it puts a different slant on it than the research that you quoted.

 

[olly]

Rereading my last post, it doesn't make a great deal of sense even to me (i'd had a couple of pints). I'll have another go.

I think the point is that investors with MLA are unable (think retail investors without expertise) or unwilling (see, perhaps, pension funds subject to annual accounting valuations at corp bond rates) to see a long term investment decision as just that - long term. They focus on the short term too much. Conversely, the notes kind of imply that it is a behavioural bias to be loss averse when looking at short term investments in general when clearly it is just good investment sense i.e. think lifestyling for DC pensions.

If the investor can see a long term investment period as multiple connected short term bets (i.e. a multi period investment horizon) rather than viewing each short term bet in isolation then they will be less concerned with the intermediate values of the investment and will therefore be less risk averse,

I think that on this basis, the core reading isn't necessarily inconsistent with the research quoted, just a bit misleading.

Agree / disagree?

Furthermore, given that there is MLA at work, the size of the irrationally short period can also be influential in the sense that e.g. if pension accounting valuations were less frequent - say triennially, funds might adopt a more agressive investment strategy with the theoretical possibility (probability) of a more positive result overall.