Myopic Loss Aversion and the Equity Premium Puzzle
Open accessAbstract
The equity premium puzzle refers to the empirical fact that stocks have outperformed bonds over the last century by a surprisingly large margin. We offer a new explanation based on two behavioral concepts. First, investors are assumed to be “loss averse,” meaning that they are distinctly more sensitive to losses than to gains. Second, even long-term investors are assumed to evaluate their portfolios frequently. We dub this combination “myopic loss aversion.” Using simulations, we find that the size of the equity premium is consistent with the previously estimated parameters of prospect theory if investors evaluate their portfolios annually.
The claims and statistics of this paper haven’t been checked yet.
Run the check — free, no account needed. It reads the open-access text and checks the sources it cites.
Integrity signals
Registry
Cites
Statistics
Claims the paper makes
The claims and statistics of this paper haven’t been checked yet.
Run the check — free, no account needed. It reads the open-access text and checks the sources it cites.
Claims other papers make about this one
Each is checked against this paper’s own text: does it say what the citing paper says it does?
Real-world data show loss-averse behavior in stock markets, pricing and purchasing of consumables and condominiums, and choice of work hours by cabdrivers.
“This work has been supported by analyses of real world data that show similar behavior in, among other situations, stock markets (26–28), the pricing and purchasing of consumables (29, 30) and condominiums (31), and the choice of work hours by cabdrivers (32).”
From Thinking like a trader selectively reduces individuals' loss aversion (2009) · cites this paper as [28]
Self-check
Percentages, sums and reported differences re-computed from the paper’s own numbers.
The self-check needs the paper’s full text.
Cites
Prospect theory: An analysis of decision under risk
Kahneman, D. J., & Tversky, A. (1988) · Cambridge University Press eBooks · doi:10.1017/cbo9780511609220.014 · Cited by 32,700 · see citing works
Advances in prospect theory: Cumulative representation of uncertainty
Tversky, A., & Kahneman, D. (1992) · Journal of Risk and Uncertainty · doi:10.1007/bf00122574 · Cited by 15,467 · see citing works
Status quo bias in decision making
Samuelson, W., & Zeckhauser, R. (1988) · Journal of Risk and Uncertainty · doi:10.1007/bf00055564 · Cited by 5,897 · see citing works
Mehra, R., & Prescott, E. C. (1985) · Journal of Monetary Economics · doi:10.1016/0304-3932(85)90061-3 · Cited by 5,764 · see citing works
Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case
Merton, R. C. (1969) · The Review of Economics and Statistics · doi:10.2307/1926560 · Cited by 5,399 · see citing works
Kahneman, D. J., & Tversky, A. (2013) · World Scientific handbook in financial economic series · doi:10.1142/9789814417358_0016 · Cited by 5,372 · see citing works
Mental Accounting and Consumer Choice
Thaler, R. (1985) · Marketing science (Providence, R.I.) · doi:10.1287/mksc.1070.0330 · Cited by 5,298 · see citing works
Self-citationFairness as a Constraint on Profit Seeking: Entitlements in the Market
Kahneman, D. J., Knetsch, J. L., & Thaler, R. H. (2000) · Cambridge University Press eBooks · doi:10.1017/cbo9780511803475.019 · Cited by 3,127 · see citing works
Self-citationExperimental Tests of the Endowment Effect and the Coase Theorem
Kahneman, D. J., Knetsch, J. L., & Thaler, R. H. (2000) · Cambridge University Press eBooks · doi:10.1017/cbo9781139175197.009 · Cited by 2,929 · see citing works
Self-citationThe Dual Theory of Choice under Risk
Yaari, M. E. (1987) · Econometrica · doi:10.2307/1911158 · Cited by 2,525 · see citing works
Thaler, R. H., & Johnson, E. J. (1990) · Management Science · doi:10.1287/mnsc.36.6.643 · Cited by 2,456 · see citing works
Self-citationThe Consumption of Stockholders and Non-Stockholders
Mankiw, N. G., & Zeldes, S. P. (1990) · Journal of Financial Economics · doi:10.1016/0304-405x(91)90015-c · Cited by 1,353 · see citing works
Risk and uncertainty: a fallacy of large numbers
Samuelson, P. A. (1963) · Cited by 606 · see citing works
The Structure and Performance of the Money Management Industry
Lakonishok, J., Shleifer, A., Vishny, R. W., Hart, O., & Perry, G. L. (1992) · Brookings Papers on Economic Activity. Microeconomics · doi:10.2307/2534766 · Cited by 572 · see citing works
Equilibrium Short Horizons of Investors and Firms
Shleifer, A., & Vishny, R. W. (1990) · American Economic Review · Cited by 561 · see citing works
Pratt, J. W., & Zeckhauser, R. (1987) · Econometrica · doi:10.2307/1911160 · Cited by 548 · see citing works
Habit Persistence and Durability in Aggregate Consumption: Empirical Tests
Ferson, W. E., & Constantinides, G. M. (1991) · National Bureau of Economic Research · doi:10.3386/w3631 · Cited by 389 · see citing works
‘First-order’ risk aversion and the equity premium puzzle
Epstein, L. G., & Zin, S. E. (1990) · Journal of Monetary Economics · doi:10.1016/0304-3932(90)90004-n · Cited by 294 · see citing works
Movements in the Equity Premium
(1993) · doi:10.2307/2534565 · Cited by 271 · see citing works
the real rate of Interest from 1800-1990: A Study of the U.S. and U.KPreprint
Siegel, J. J. (1991) · RePEc: Research Papers in Economics · Cited by 67 · see citing works
Legal Policy and the Endowment Effect
Hovenkamp, H. (1991) · The Journal of Legal Studies · doi:10.1086/467886 · Cited by 59 · see citing works
Shortfall risk and the asset allocation decision
Leibowitz, M. L., & Langetieg, T. C. (1989) · The Journal of Portfolio Management · doi:10.3905/jpm.1989.409236 · Cited by 48 · see citing works
Flagged first, then by citations
Research works printed but not linked: 13
- Banz, A. W. "The Relationship between Return and Market Value of Common Stoóks," Journal of Financial Economics, 9, 1981, 3-18.
- Black, F. "The Tax Consequences of Long-Run Pension Policy," Financial Analysts Journal, July-August 1980, 21-28
- Blinder, A.S. Why are Prices Sticky? Preliminary Results from an Interview Study," American Economic Review, Papers and Proceedings, 81, May 1991, 89-96.
- Constantinides, G. M., "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy 1990, 519-543.
- Keim, D. "Size-Related Anomalies and Stock Return Seasonality: Further Empirical Evidence," Journal of Financial Economics, June 1983, 13-32.
- Libby, R. and P. C. Fishbum, "Behavioral Models of Risk Taking in Business, Journal of Accounting Research, Autumn 1977, 272-292.
- Mehra, R., and E. C. Prescott, "The Equity Premium Puzzle," Journal of Moneta,y Economics 1985, 145-161.
- Reitz, T., "The Equity Risk Premium: A Solution?," Journal of Moneta,y Economics 1988, 117-132.
- Samuelson, P. A., "Lifetime Portfolio Selection by Dynamic Stochastic Programming," Review of Economics and Statistics, LI, 1969, 238-246.
- Siegel, J. J. "The Equity Premium: Stock and Bond Returns Since 1802,' Financial Analysts Journal, January-February 1992, 28-38.
- Swalm, R. 0., "Utility Theory--Insights into Risk Taking," Harvard Business Review, November/December 1966, 123-136.
- Tversky, A., and M. Bar-Hillel, "Risk: The Long Run and the Short,' Journal of Experimental Psychology: Human Learning, Memory, and Cognition 9, 1983, 713-717.
- Weil, Philippe, "The Equity Premium Puzzle and the Risk-free Rate Puzzle,' Journal of Monetary Economics, 24, 1989, 401-421.
Cited by
Sorted by citations
Loewenstein, G. F., Weber, E. U., Hsee, C. K., & Welch, N. (2001) · Psychological Bulletin · doi:10.1037/0033-2909.127.2.267 · Cited by 5,955 · see citing works
Maps of Bounded Rationality: Psychology for Behavioral Economics
Kahneman, D. (2003) · American Economic Review · doi:10.1257/000282803322655392 · Cited by 5,377 · see citing works
Odean, T. (1999) · American Economic Review · doi:10.1257/aer.89.5.1279 · Cited by 2,247 · see citing works
The neural basis of loss aversion in decision-making under risk
Tom, S. M., Fox, C. R., Trepel, C., & Poldrack, R. A. (2007) · Science · doi:10.1126/science.1134239 · Cited by 1,733 · see citing works
An Experiment on Risk Taking and Evaluation Periods
Gneezy, U., & Potters, J. (1997) · The Quarterly Journal of Economics · doi:10.1162/003355397555217 · Cited by 1,288 · see citing works
Labor Supply of New York City Cabdrivers: One Day at a Time
Camerer, C., Babcock, L., Loewenstein, G., & Thaler, R. (1997) · The Quarterly Journal of Economics · doi:10.1162/003355397555244 · Cited by 1,218 · see citing works
Self-citationDo Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis
HAIGH, M. S., & LIST, J. A. (2005) · The Journal of Finance · doi:10.1111/j.1540-6261.2005.00737.x · Cited by 754 · see citing works
Patterns of behavior of professionally managed and independent investors
Shapira, Z., & Venezia, I. (2001) · Journal of Banking & Finance · doi:10.1016/s0378-4266(00)00139-4 · Cited by 699 · see citing works
Emotion and Rationality: A Critical Review and Interpretation of Empirical Evidence
Pham, M. T. (2007) · Review of General Psychology · doi:10.1037/1089-2680.11.2.155 · Cited by 552 · see citing works
Investment behavior and the negative side of emotion
Shiv, B., Loewenstein, G., Bechara, A., Damasio, H., & Damasio, A. R. (2005) · Psychological Science · doi:10.1111/j.0956-7976.2005.01553.x · Cited by 485 · see citing works
How Basic Are Behavioral Biases? Evidence from Capuchin Monkey Trading Behavior
Chen, M. K., Lakshminarayanan, V., & Santos, L. R. (2006) · Journal of Political Economy · doi:10.1086/503550 · Cited by 472 · see citing works
Thinking like a trader selectively reduces individuals' loss aversion
Sokol-Hessner, P., Hsu, M., Curley, N. G., Delgado, M. R., Camerer, C. F., & Phelps, E. A. (2009) · Proceedings of the National Academy of Sciences · doi:10.1073/pnas.0806761106 · Cited by 452 · see citing works
Heterogeneity in Risky Choice Behavior in a Broad Population
von Gaudecker, H.-M., van Soest, A., & Wengström, E. (2011) · American Economic Review · doi:10.1257/aer.101.2.664 · Cited by 349 · see citing works
Testing competing models of loss aversion: an adversarial collaboration
Bateman, I., Kahneman, D., Munro, A., Starmer, C., & Sugden, R. (2005) · Journal of Public Economics · doi:10.1016/j.jpubeco.2004.06.013 · Cited by 208 · see citing works
Berthet, V. (2022) · Frontiers in Psychology · doi:10.3389/fpsyg.2021.802439 · Cited by 191 · see citing works
Hsee, C. K., Yu, F., Zhang, J., & Zhang, Y. (2003) · Journal of Consumer Research · doi:10.1086/374702 · Cited by 171 · see citing works
The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis
Menkhoff, L., & Taylor, M. P. (2007) · Journal of Economic Literature · doi:10.1257/jel.45.4.936 · Cited by 78 · see citing works
“…and Schlumberger (1995) suggest addressing the risk inherent in using technical analysis by focusing on the monthly difference between the rules' profitability performance and a buy-and-hold performance (this may be understood as a form of myopic loss aversion, see Benartzi and Thaler, 1995).”
BackgroundCognitive abilities and portfolio choice
Christelis, D., Jappelli, T., & Padula, M. (2010) · European Economic Review · doi:10.1016/j.euroecorev.2009.04.001 · Cited by 30 · see citing works
- Authors
- Benartzi, S., & Thaler, R. H.
- Affiliations
- University of Southern California (US)
- National Bureau of Economic Research (US)
- ORCID
- Thaler, R. H.
- Venue
- The Quarterly Journal of Economics
- Publisher
- Oxford University Press (OUP)
- Published
- 1995-02-01
- Volume
- 110
- Issue
- 1
- Pages
- 73-92
- ISSN
- 0033-5533 (ISSN-L)
- 1531-4650
- OpenAlex
- W1977145788
- Cited by
- 2,487
- References
- 22
- Citations by year
- 2026: 98 · 2025: 87 · 2024: 115 · 2023: 110 · 2022: 106 · 2021: 121 · 2020: 114 · 2019: 99 · 2018: 148 · 2017: 112 · 2016: 104 · 2015: 88 · 2014: 108 · 2013: 98 · 2012: 103
- FWCI
- 22.36
- Type
- journal article
- Language
- en
- Open access
- green
- www.nber.org
- Locations
- The Quarterly Journal of Economics (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- HighWire Press Open Archive (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
- Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
- Social Sciences › Business, Management and Accounting › Accounting › Financial Literacy, Pension, Retirement Analysis
- Keywords
- equity premium puzzle, loss aversion, myopic loss aversion, prospect theory, portfolio rebalancing, behavioral finance
About these checks
Registry, retraction, Cites and statistics results are computed, not judged, with one exception: a printed reference that no index lists is read once by a model before it counts as a citation error. Claims are extracted by a model and kept only when their quote appears verbatim in the text; each cited source is then checked, with a model’s help, for whether it says what the claim relies on. Those verdicts can be wrong — read the claim’s quote and the cited source before relying on one.
Statistics and arithmetic are recomputed, not judged.
Confidence bands are shown only for fields calibrated on our annotated test set. None is calibrated yet, so no band is shown.
What counts as a claim ›How we measure confidence ›How we check this ›
Are you an author, or do you see a problem with this page? Request a review
