Beyond Myopia: Wealth Accumulation Mechanisms and Evolving Risk Behaviors

Clayton A. Looney, Andrew M. Hardin

Research output: Contribution to journalArticlepeer-review

Abstract

Conceived as a theoretical explanation for the equity premium puzzle, myopic loss aversion (MLA) explains excessively conservative investment choices through a combination of short-term perspectives (i.e., myopia) and an aversion toward losses. Whereas MLA research has shed light on the mechanisms inducing myopia, which triggers loss aversion, the theory offers limited guidance on evolving risk behaviors. Contributing to the literature, the present effort extends MLA with complementary theoretical perspectives, leading to a richer understanding of the intricacies associated with repeated choices involving risk and uncertainty, such as retirement portfolio management. Drawing on the broader cumulative prospect theory, this article focuses on the moderating role of wealth accumulation mechanism (WAM) on risk behavior trends. Consistent with predictions, three experiments demonstrate that the additive WAM, which prevents reinvestments in subsequent periods, fosters a distinct and repeatable pattern of increasingly riskier behaviors. In contrast, the multiplicative WAM, where payoffs may be reinvested, produces stable or decreasing trends. Whereas novices exhibit stable allocations throughout our simulations, actual retirement plan participants systematically increase allocations to the safe asset as retirement approaches. These results clearly show that factors beyond MLA drive behavioral trends in repeated choice environments, carrying important implications for theory and practice.

Original languageEnglish
JournalDecision
DOIs
StateAccepted/In press - 2020

Keywords

  • Myopic loss aversion
  • Prospect theory
  • Reference point adaptation
  • Relative risk
  • Wealth accumulation mechanism

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