Is the equity premium puzzle just a lack of foresight? The impact of targeting on myopic loss a aversion

Abstract

Imagine an individual facing three identical investment decisions in a row. Each time she decides on how much to invest in a risky asset or save. Also, imagine the same individual deciding about three consecutive investments at once. Equal for rational investors, when suffering Myopic Loss Aversion, the latter scenario is perceived differently though: More is invested when payoffs are evaluated over a greater time horizon. Based on the theory of reference points I proposed a novel method – investment targets – to shift attention to longer-term goals. I find that exogenously proposed targets eliminate Myopic Loss Aversion in an experiment.