Myopic Prospect Theory vs. Myopic Loss Aversion: How General Is the Phenomenon?

Individuals often act myopically when they evaluate sequences of investment opportunities. For a loss averse decision maker, such myopia causes the sequence to look less attractive and might result in the rejection of an investment program that would have been accepted in less myopic view (Benartzi and Thaler, 1995). In this paper, we argue that the relation between myopia and the attractiveness of a lottery sequence is not as general as previous literature might suggest. We extend the concept myopic loss aversion to become myopic prospect theory and predict that for specific risk profiles, myopia will not decrease but increase the attractiveness of a sequence. We support our theoretical predictions by experimental evidence. JEL Classification: D81