Q: What action would serve to mitigate loss aversion as a bias that contributes to inefficiently priced stocks? A: Monitoring stock performance less frequently. Can someone please explain the reasons why more clearly than Schweser? Thank you!
Loss aversion leads to taking uncessary risks to get out of debt and is often sparked when your position has lost paper value. by monitoring your position less, you are less susceptable to taking unecessary risks in order to mitigate losses.
well said striker…the concept is myopic loss aversion whereby investors make decisions to sell when they see losses over the short term even though they have long term horizons.
i would submit that loss aversion and myopic loss aversion are opposite things. loss aversion is when people choose uncertainty between definite loss and uncertainty. In myopic loss aversion, people choose definite loss when they unload underperforming stocks. In a loss averse behavior, people would hold on to their underperforming position too long. So the two terms seems to indicate opposite behaviors.
Ok, investors will rather HOLD then sell and take a loss. It is the same idea as taking a gamble or accept a sure loss (See CFAI material on behavior finance). Loss aversion is simply that - Investors are averse (they perfer no loss to a loss). Since investor will shift from less preferable asset allocation to more preferable asset allocation, if every investor would monitor stocks daily, There would be almost no investors into equity as loss aversion would drive them away. So to mitigate loss aversion bios (mind you, nothing you can do about bias itself, you can only mitigate it), you should simply monitor your positions less frequently, therefore you will witness less loss and will have more preference for equities.