|M.Sc Student||Itai Zak|
|Subject||Uncertainty and Myopic Loss Aversion|
|Department||Department of Industrial Engineering and Management||Supervisor||Mr. Gneezy Uri|
Recently, Benartzi and Thayler (1995) put forward an explanation for the equity premium puzzle. This puzzle refers to the fact that over the last century the risk-return relationship has been much more favorable for stocks than for bonds, that unreasonably high level of risk aversion would be needed to explain why investors are willing to hold bonds at all (Mehra and Prescott 1985). The explanation for this puzzle, advanced by Benartzi and Thaler is called myopic loss aversion (M.L.A.) and rests on the combination of two behavioral concepts.
The first concept is loss aversion. Loss aversion refers to the tendency of individuals to be more sensitive to reductions in their levels of well being than to increases. The second behavioral concept is mental accounting. Mental accounting refers to the implicit methods individuals use to code and evaluate financial outcomes.
This purpose of this research is to investigate the M.L.A. phenomenon and the way it is taking place under uncertainty. Researches that have been done during the last years examined this phenomenon and examined the way it affects the investors’ decisions when everybody knows the probabilities to loss and gain. It will be interesting to examine the way the Myopic Loss Aversion affects the investors’ decisions when we are moving from a situation of risk to situation of uncertainty.