Myopic Loss Aversion and the Equity Premium Puzzle

@article{benartzi-thaler-95, abstract = {The equity premium puzzle refers to the empirical fact that stocks have outperformed bonds over the last century by a surprisingly large margin. We offer a new explanation based on two behavioral concepts. First, investors are assumed to be "loss averse," meaning that they are distinctly more sensitive to losses than to gains. Second, even long-term investors are assumed to evaluate their portfolios frequently. We dub this combination "myopic loss aversion." Using simulations, we find that the size of the equity premium is consistent with the previously estimated parameters of prospect theory if investors evaluate their portfolios annually.}, author = {Benartzi, Shlomo and Thaler, Richard H. }, citeulike-article-id = {157072}, comment = {They apply prospect theory and find that myopic loss aversion provides an explanation to the puzzle. The story: investors evaluate their portfolio in a relatively short sighted way, loss aversion implies, they are highly sensitive to losses over this time period. The evaluation time period implied in their model by a 6\% equity premium and a 2x loss aversion multiplier is approximately one year. }, journal = {The Quarterly Journal of Economics}, keywords = {asset\_pricing, macroeconomics, prospecttheory}, number = {1}, pages = {73--92}, posted-at = {2005-04-09 12:16:53}, priority = {2}, title = {Myopic Loss Aversion and the Equity Premium Puzzle}, url = {http://www.jstor.org/stable/2118511}, volume = {110}, year = {1995} }

TY - JOUR ID - benartzi-thaler-95 L3 - citeulike-article-id:157072 TI - Myopic Loss Aversion and the Equity Premium Puzzle JF - The Quarterly Journal of Economics VL - 110 IS - 1 SP - 73 EP - 92 N2 - The equity premium puzzle refers to the empirical fact that stocks have outperformed bonds over the last century by a surprisingly large margin. We offer a new explanation based on two behavioral concepts. First, investors are assumed to be "loss averse," meaning that they are distinctly more sensitive to losses than to gains. Second, even long-term investors are assumed to evaluate their portfolios frequently. We dub this combination "myopic loss aversion." Using simulations, we find that the size of the equity premium is consistent with the previously estimated parameters of prospect theory if investors evaluate their portfolios annually. KW - asset_pricing KW - macroeconomics KW - prospecttheory N1 - They apply prospect theory and find that myopic loss aversion provides an explanation to the puzzle. The story: investors evaluate their portfolio in a relatively short sighted way, loss aversion implies, they are highly sensitive to losses over this time period. The evaluation time period implied in their model by a 6% equity premium and a 2x loss aversion multiplier is approximately one year. AU - Benartzi, Shlomo AU - Thaler, Richard PY - 1995/// UR - http://www.jstor.org/stable/2118511 ER -