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Myopic loss aversion, or the combination of loss aversion and frequent portfolio evaluation, has been argued to possibly be one of the factors behind the equity premium puzzle. The purpose of this paper is to offer an alternative systematic test that looks at the relationship between inflation and equity premium to test for this theory.

Inflation and equity premium tends to be positively associated, both in standard rational-agents theoretical models and in simple empirical measures of correlation. Nonetheless, under the presence of nominal return evaluation, behavioral models such as myopic loss aversion do predict a negative causal relationship between those variables. This study aims to check this negative causal relationship. The identification strategy combines elements of two approaches: fixed effects regression on short-term returns and long-term least squares regression. As both methods have different strengths and weaknesses, and use different sources of data variation to compute their estimators, it is argued that the combination of these approaches provides a better identification strategy than each individual method.

This paper finds evidence for a negative relationship between inflation and equity premium in both methods, which supports myopic loss aversion theory. The magnitude of the coefficients is also relevant ranging from −0.23 to −0.80. However, it is also shown that these effects explain only a small part of equity premium observed variation, and are more prevalent in non-industrialized countries, which limits the scope of the theory.

The current method for testing myopic loss aversion theory is overly reliant on experimental evidence collected in the lab to estimate behavioral parameters and simulations. The authors complement these by providing an empirical study.

Prospect theory is now widely accepted as the dominant model of choice under risk, but has not been fully incorporated into applied research because of uncertainty about how to include population-level parameter estimates. The purpose of this paper is to characterize heterogeneity across people to lay a foundation for future applied research.

The paper uses elicitation data from field experiments in Vietnam to fit a finite Gaussian mixture model using the expectation maximization algorithm. Applied results are simulated for investment allocations under myopic loss aversion.

The authors find that about 20 percent of the sample is classified as extremely loss averse, while the rest of the population is only mildly loss averse. This implies a bimodal distribution of loss aversion in the population.

The data set is only moderately sized: 181 subjects. Future research will be needed to extend these results out of sample, and to other regions.

This paper provides empirical evidence that heterogeneity matters in prospect theory modeling. It highlights how policy makers might be misled by assuming that average prospect theory parameters are typical within the population.

Previous studies showed mixed results as to the cause of myopic loss aversion (MLA). This paper reexamines the main driver of MLA, considering two factors from previous studies and an additional factor.

Experimentally investigate whether flexibility of investment, frequency of information feedback, or timing of decision cause MLA.

Timing of decision and flexibility of investment explain most differences in subject behavior. Frequency of information feedback makes only a marginal contribution.

The differences in subject behavior can be interpreted by a shift in their reference points depending on the difference in flexibility of investment, frequency of information feedback, or timing of decision.

We review the experimental evidence on risk aversion in controlled laboratory settings. We review the strengths and weaknesses of alternative elicitation procedures, the strengths and weaknesses of alternative estimation procedures, and finally the effect of controlling for risk attitudes on inferences in experiments.

The purpose of this paper is to investigate whether the gender composition of a fund management team influences investment decision-making behavior. Specifically, we focus on how portfolio choice is affected by team risk aversion and loss aversion.

Using an experimental economics approach, the paper examines the relationship between gender diversity and investment decisions. Teams of four persons each were given the task of making investment portfolio management decisions.

The paper finds that team composition does influence financial decisions with regard to the assessment of risk and loss. The paper finds evidence that a male presence increases the probability of selecting a higher risk investment. However, the all male teams are not the most risk seeking. Moreover, having a male presence can increase loss aversion.

In the context of workforce composition, these results could have important implications for team investment decisions driven by the assessment of risk and return tradeoffs. To curb excessive risk taking and loss aversion, the findings would suggest that understanding the role of gender diversity in risk management would be useful in effecting change.

We take Cumulative Prospect Theory (CPT) seriously by rigorously estimating structural models using the full set of CPT parameters. Much of the literature only estimates a subset of CPT parameters, or more simply assumes CPT parameter values from prior studies. Our data are from laboratory experiments with undergraduate students and MBA students facing substantial real incentives and losses. We also estimate structural models from Expected Utility Theory (EUT), Dual Theory (DT), Rank-Dependent Utility (RDU), and Disappointment Aversion (DA) for comparison. Our major finding is that a majority of individuals in our sample locally asset integrate. That is, they see a loss frame for what it is, a frame, and behave as if they evaluate the net payment rather than the gross loss when one is presented to them. This finding is devastating to the direct application of CPT to these data for those subjects. Support for CPT is greater when losses are covered out of an earned endowment rather than house money, but RDU is still the best single characterization of individual and pooled choices. Defenders of the CPT model claim, correctly, that the CPT model exists “because the data says it should.” In other words, the CPT model was borne from a wide range of stylized facts culled from parts of the cognitive psychology literature. If one is to take the CPT model seriously and rigorously then it needs to do a much better job of explaining the data than we see here.

The purpose of this paper is to report new original evidence on optimal holding periods and optimal asset allocations (Benartzi and Thaler, 1995).

The authors employ a number of different value functions, a recent dataset, different markets, and varying investment horizons.

The authors report original evidence across markets and over-time, employing different value functions and varying investment horizons. The results results indicate that, during the past decades, the optimal holding period (seven months during the whole period and four/five months during crises) is not affected by the value function employed, is in accordance with the Myopic Loss Aversion hypothesis, is consistent across markets, but is sensitive to economic crises and shorter to that reported in Benartzi and Thaler (12 months). The optimal asset allocation is also different to that of Benartzi and Thaler during crises periods and/or assuming value functions with probability distortion.

The paper employs a number of different value functions, with and without probability distortion; it compares investor behavior in three important international markets (USA, UK, Germany); as a further robustness test the authors use various investment horizons.

This study aims to examine the consumption behaviour in Organization of Islamic Cooperation countries.

Using time series and panel data, this study estimates rational expectations permanent income hypothesis model and the intertemporal elasticity of substitution, and examines the response in consumption to expected and unexpected changes in income.

The evidence supports the phenomenon of loss aversion. The response of consumption to unexpected income changes is statistically significant in only one-third of the countries in the sample. Conversely, the response of consumption to expected income changes is statistically as well as economically significant in one-fourth of the countries in the sample. The intertemporal elasticity of substitution is also statistically insignificant in majority of OIC countries in the sample.

The evidence in support of loss aversion in preferences could help in explaining the low penetration of equity-based risk sharing instruments in Islamic finance.

The excess sensitivity of consumption to income suggests that redistribution efforts to enhance incomes of poor households could help in enhancing their consumption levels.

The study takes a comprehensive sample across time and space for OIC countries as compared to previous studies and also adjusts the budget constraint for Zakat.

The purpose of this paper is to study and describe several biases in investment decision-making through the review of research articles in the area of behavioral finance. It also includes some of the analytical and foundational work and how this has progressed over the years to make behavioral finance an established and specific area of study. The study includes behavioral patterns of individual investors, institutional investors and financial advisors.

The research papers are analyzed on the basis of searching the keywords related to behavioral finance on various published journals, conference proceedings, working papers and some other published books. These papers are collected over a period of year’s right from the time when the most introductory paper was published (1979) that contributed this area a basic foundation till the most recent papers (2016). These articles are segregated into biases wise, year-wise, country-wise and author wise. All research tools that have been used by authors related to primary and secondary data have also been included into our table.

A new era of understanding of human emotions, behavior and sentiments has been started which was earlier dominated by the study of financial markets. Moreover, this area is not only attracting the, attention of academicians but also of the various corporates, financial intermediaries and entrepreneurs thus adding to its importance. The study is more inclined toward the study of individual and institutional investors and financial advisors’ investors but the behavior of intermediaries through which some of them invest should be focused upon, narrowing down population into various variables, targeting the expanding economies to reap some unexplained theories. This study has identified 17 different types of biases and also summarized in the form of tables.

The study is based on some of the most recent findings to have a quick overview of the latest work carried out in this area. So far very few extensive review papers have been published to highlight the research work in the area of behavioral finance. This study will be helpful for new researches in this field and to identify the areas where possible work can be done.

Practical implication of the research is that companies, policymakers and issuers of securities can watch out of investors’ interest before issuing securities into the market.

Under the Social Implication, investors can recognize several behavioral biases, take sound investment decisions and can also minimize their risk.

The essence of this paper is the identification of 17 types of biases and the literature related to them. The study is based on both, the literature on investment decisions and the biases in investment decision-making. Such study is less prevalent in the developing country like India. This paper does not only focus on the basic principles of behavioral finance but also explain some emerging concepts and theories of behavioral finance. Thus, the paper generates interest in the readers to find the solutions to minimize the effect of biases in decision-making.

The purpose of this second of two companion papers is to further review the insights provided by experimental studies examining financial decisions and market behavior.

Focus is directed on those studies examining explicitly, or with direct implications for, the most robustly identified phenomena or stylized facts observed in behavioral finance. The themes for this second paper are biases, moods and emotions.

Experiments complement the findings from empirical studies in behavioral finance by avoiding some of the limitations or assumptions implicit in such studies.

The author synthesizes the valuable contribution made by experimental studies in extending the knowledge of how biases, moods and emotions influence the financial behavior of individuals, highlighting the role of experimental studies in policy design and intervention.