Risk aversion or myopia? Choices in repeated gambles and retirement investments

Risk aversion or myopia? Choices in repeated gambles and retirement investments

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Article ID: iaor20001920
Country: United States
Volume: 45
Issue: 3
Start Page Number: 364
End Page Number: 381
Publication Date: Mar 1999
Journal: Management Science
Authors: ,
Keywords: risk, decision theory
Abstract:

We study how decision makers choose when faced with multiple plays of a gamble or investment. When evaluating multiple plays of a simple mixed gamble, a chance to win x or lose y, subjects show a sensitivity to the amount to lose on a single trial, holding the distribution of returns for the portfolio constant; that is, they display ‘myopic loss aversion’. Many subjects who decline multiple plays of such a gamble will accept it when shown the resulting distribution. This analysis is applied to the problem of retirement investing. We show that workers invest more of their retirement savings in stocks if they are shown long-term (rather than one-year) rates of return.

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