Glossary
Myopic Loss Aversion
What is myopic loss aversion?
Myopic loss aversion combines sensitivity to losses with frequent evaluation of outcomes. Even someone with a long planning horizon may evaluate gains and losses over short intervals.
Research foundation
Benartzi and Thaler proposed the concept in 1995 as a possible explanation for the equity premium puzzle. Their simulations examined whether loss aversion and frequent portfolio evaluation could make the historical return difference between stocks and bonds consistent with the model.
Illustrative mechanism
An investment can show many negative short-period returns while having a positive result over a longer interval. Evaluating each period separately gives those losses a different role from evaluating the combined result.
For a hypothetical investment with no deposits or withdrawals, suppose four successive periods produce dollar changes of −$10, −$10, +$30, and −$5. Viewed separately, there are three losses and one gain. Viewed together, the result is a $5 gain. The investment record has not changed; the evaluation window has.
If losses receive extra weight in someone’s evaluation, judging each period separately can make the experience less attractive than judging the combined result. This illustrates the proposed mechanism, not a forecast of returns or advice about how often to review investments.
Limits of the evidence
The original analysis is a model-based explanation, not proof that this mechanism determines every investor’s behavior or fully explains market returns.