Nov 02, 2015

Question: What's Myopic Loss Aversion?

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Answer: It’s what happens when you look at stock prices too frequently on your smart phone and make rash investment decisions !

From Wall Street Journal:

Is your smartphone making you a not-so-smart investor? For many people, the answer is yes, for a simple reason: They tend to make investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan. Behavioral economists call that tendency “myopic loss aversion”—and it can be incredibly costly…What does this have to do with your smartphone? The main trigger of myopic loss aversion is frequent feedback. When people are frequently told how their investments are doing—say, if they are given a daily update on their long-term investments, by smartphone or any other digital device—they are more likely to make poor financial decisions and possibly sell at the wrong time.

So, how might you test this well known phenomenon with your class?

If you play a stock market game, ask your students during the game to track how frequently they are checking the prices on their stocks. See if there is a relationship between the frequency of checking stock prices and performance. Did the students who checked their stocks the most also trade the most and how might this have impacted their performance.

As someone who is guilty of this “frequent feedback,” I am going to try and go cold turkey and only check prices weekly. Let’s see how I do:)

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Check out the NGPF Lesson on Investing Strategies

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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