Myopic Loss Aversion

What it is

The term joins two ingredients. The first is loss aversion, the tendency to feel a loss more sharply than an equal gain. The second is the length of the period over which results are looked at. A person who checks a result often sees more small losses, and if losses weigh more than gains, frequent checking makes risky options look worse than they would over a longer view.

The second ingredient is the part of Thaler's definition of mental accounting that concerns how often accounts are checked and how widely they are drawn. In his 1999 review he describes that feature as choice bracketing. Myopic loss aversion is what happens when the first ingredient meets a short interval for the second.

The 1997 paper in the Quarterly Journal of Economics set out to test the idea experimentally with two predictions: that investors who evaluate their investments less often will accept more risk, and that if all payoffs are raised enough to remove the losses, investors will accept more risk.

In effect

Both predictions were supported in a task in which the participants learned from experience. Participants who evaluated less often accepted more risk. Raising the payoffs so that no outcome was a loss also raised the risk they accepted. The participants who got the most frequent feedback, and therefore the most information, took the least risk and earned the least money.

The result separates two things that are usually mixed together in everyday investing: how risky an option is, and how often its outcome is shown. In the experiment the second changed behaviour and earnings.

The experiment treats the interval at which results are reported as something that can be varied, and the variation changed the risk participants accepted.

What it does not say

It does not say that people who check their investments often will lose money. The result comes from an experimental task with participants who learned from experience, and the page makes no claim about how the same pattern would appear in a household's own savings.

It does not say that more risk is better. The earnings result belongs to the payoffs of the task, not to investing in general.

It is not advice about how often to check an account.

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