The Interaction Effect of Myopia and Time-Inconsistent Preferences on Happiness-Related Loss Aversion of Investors

In this research the interaction effect of myopia and time-inconsistent preferences on loss aversion in happiness of investors is assessed. An experiment is held to elicit the happiness individuals perceive when presented with their performance in a hypothetical investment. The result is a counter-intuitive order of loss aversion ratios where myopic perceived loss aversion is the lowest ratio, while standard perceived loss aversion is the highest ratio. Time-inconsistent preferences in the literature have shown that investors expect more loss aversion than they perceive retrospective. Myopia should increase loss aversion by the increased frequency of evaluating performance. Much research is done on risk and return, but less on investor happiness. More precisely, interactions of effects on happiness are mostly neglected. When only smaller performance domains between -11% and 11% are used to derive loss aversion, myopic expected loss aversion is the highest ratio, while standard perceived loss aversion is the lowest ratio. Moreover, this sequence also appears when not a 0% return but 20% is used to separate gains from losses, and when only are investors examined. The findings imply that myopic loss aversion does not hold for non-investors and that the time-inconsistent preferences do not follow a one-way direction if combined with myopia.