Myopic loss aversion or equate-to-differentiate heuristic? A heuristic decision making model for both single and aggregated plays

Abstract

Myopic loss aversion (MLA)—a combination of myopic loss and a greater sensitivity to losses than gains—has been proposed to explain the equity premium puzzle and then extended to myopic prospect theory (MPT). However, such an expected-value/utility-based theory has been challenged and the underlying mechanism remains debatable. In the current study, we applied the modified equate-to-differentiate model to address this phenomenon. In Experiment 1, we first directly explored the relationship between individuals’ degree of loss aversion and their investment amounts in risky lotteries for both single and repeated plays. We found no correlations between these variables; this was inconsistent with the MLA/MPT prediction. Experiment 2 showed that individuals’ evaluation scores of the differences within the dimension (probability or outcome) that has larger differences highly predicted their investment behavior, which supported the equate-to-differentiate model.

Keywords:

• Myopic loss aversion
• equity premium puzzle
• heuristic decision
• equate-to-differentiate
• decision making

Disclosure statement

The authors declare that the research was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest.

Additional information

Funding

This research was supported by the National Natural Science Foundation of China [No. 31900781], the Humanities and Social Sciences Foundation of the Chinese Ministry of Education [No. 19YJC190033, No. 18YJA840016], and the Social Science Plan Foundation of Zhejiang Province [No. 20XXJC05Z, No. 21XXJC01ZD].