Risk Perceptions and Financial Decisions of Individual Investors

Myopic loss aversion was suggested by Benartzi and Thaler (1995) as the main explanation for the equity premium puzzle. We investigate the impact of myopic loss aversion on actual investment decisions of 400 Dutch individual investors, covered by the Dutch National Bank Household Survey. We find that higher loss aversion is associated with a lower share of investments in risky assets. The investors also tend to self-select relatively high evaluation frequency. The combination of short investment horizon and high loss aversion leads to significantly lower levels of risky investments, confirming the main prediction of the myopic loss aversion theory. The effect of myopia is strongest when both evaluation and rebalancing frequencies are high. We also find that less myopic individuals increase their investment over time, although this effect is unrelated to their loss aversion.