[STBI-14-01-2016] Can “Myopic loss aversion” explain today’s equity premia? An investigation with international data

by Mr. Ngo Minh Hai

11:00 am, Thursday, 14-01-2016
Hall H.001, UEH School of Economics

Abstract

The seminal work of Benartzi and Thaler (1995) sets the first brick in explaining the equity premium puzzle by intergrating the concepts of loss aversion and mental accounting into Myopic Loss Aversion Theory. Intuitively, investors in general are loss averse. Their degrees of loss aversion increase with the frequency of the port- folio balancing. Even though Benartzi and Thaler (1995)’s results strongly support the “myopic loss aversion” approach, our empirical investgation doubts the strong assumption of the one-year investment horizon and proves its failures in explaining the recent equity premium puzzle.
We calibrate Benartzi and Thaler (1995)’s results with US and international stock-and-bond data from Datastream and Prospect Theory parameters from an international survey (Rieger et al. (2011, 2013a,b)). We documents the incomplete- ness of the “Myopic Loss Aversion” mechanism in explaining the equity premimum puzzle in particularly US and other countries in general. In our point of view, in- vestors nowaday are less patient (shorter investment horizon) and actually averse toward the probability of getting a loss, not “pure” loss aversion. Other components of Prospect Theory contribute also to the myopic behaviors of investors. Which set lights on a more general model: Myopic Prospect Theory.

Presenter

Mr. Ngo Minh Hai is currently a lecturer at School of Banking, University of Economics Ho Chi Minh City (UEH). He is also a PhD Candidate at University of Trier, Germany. His research studies focus on behavioral finance, asset pricing and stock market behaviors.