The Consequences of Narrow Framing for Risk-Taking: A Stress Test of Myopic Loss Aversion

Forthcoming in: Management Science

Myopic loss aversion, which combines individuals’ narrow focus on short-term portfolio returns and a strong fear of losses, has long been considered a major barrier to stock market participation by academics. However, recent studies suggest that this phenomenon may not be as consistent in more realistic experimental scenarios. In a systematic online experiment involving over 2,000 participants, we demonstrate that myopic loss aversion remains significant when considering realistic investment returns, time horizons, and the effects of compound interest. These findings underscore the need to emphasize long-term returns in financial communications, promote long-term investment incentives like tax benefits, and enhance financial education to mitigate short-term biased behaviors in financial markets.

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