Myopic Loss Aversion and the Equity Premium Puzzle

The equity premium puzzle, first documented by Mehra and Prescott, refers to the empirical fact that stocks have greatly outperformed bonds over the last century. As Mehra and Prescott point out, it appears difficult to explain the magnitude of the equity premium within the usual economics paradigm because the level of risk aversion necessary to justify such a large premium is implausibly large. We offer a new explanation based on Kahneman and Tversky's 'prospect theory'. The explanation has two components. First, investors are assumed to be 'loss averse' meaning they are distinctly more sensitive to losses than to gains. Second, investors are assumed to evaluate their portfolios frequently, even if they have long-term investment goals such as saving for retirement or managing a pension plan. We dub this combination 'myopic loss aversion'. Using simulations we find that the size of the equity premium is consistent with the previously estimated parameters of prospect theory if investors evaluate their portfolios annually. That is, investors appear to choose portfolios as if they were operating with a time horizon of about one year. The same approach is then used to study the size effect. Preliminary results suggest that myopic loss aversion may also have some explanatory power for this anomaly.

Save More Later? The Effect of the Option to Choose Delayed Savings Rate Increases on Retirement Wealth

Prior research in economics and psychology has documented that individuals exhibit time-inconsistent preferences when faced with the opportunity to take an action that involves immediate costs in return for future benefits – the notion of implementing such an action now is unappealing, but the notion of implementing the same action later is attractive. Because increasing contributions to a retirement savings plan requires a reduction in current consumption (an immediate cost) in order to increase consumption in old age (a future benefit), individuals may be more likely to agree to a contribution rate increase if they have the option to have the increase implemented at a delay. We conducted a field experiment with several universities to test whether the option to choose a delayed contribution rate increase boosts savings. Relative to employees who are offered a convenient mechanism for increasing their contribution rates immediately, employees who are offered a convenient mechanism for increasing their contribution rates immediately or at a delay are no more likely to agree to an increase. In fact, the latter group exhibits lower savings rates over the coming months, as the delayed option attracts some employees. However, when the delayed option is framed as being implemented after a psychologically meaningful moment, such as an employee’s next birthday, the negative effect of offering a delayed option is undone

Ultrasound is better tolerated than vaginal examination in and before labour

BACKGROUND: Intrapartum ultrasound has been proposed as a method of assessing labour progress but its acceptability has not been comprehensively assessed. AIMS: We evaluated the acceptability of intrapartum ultrasound in women having vaginal examination (VE) and ultrasound (US) assessment (transabdominal (TA) and transperineal (TP)) prior to delivery, with and without regional analgesia (RA). MATERIALS AND METHODS: Women at 24-42 weeks gestation were included in a prospective observational cohort study. The acceptability of digital VE and TP US were assessed pre- and post-examination using the modified validated Wijma Delivery Experience Questionnaire. Acceptability scores ranged 6-36 (6 being most and 36 being least positive) in six domains: positive-trust and relax, negative-harmful to baby, worrying, painful, intrusive. RESULTS: Of 119 women recruited, 104 completed both pre- and post-assessment questionnaires. Eighty-nine per cent of women were nulliparous with median gestation 40 + 2 weeks (25-42+1 ). Thirty-two per cent had RA before assessment, 91% in total. The combined acceptability scores of both negative and positive experiences (6 = most acceptable, 36 = least acceptable) for VE and US pre-assessment were 15 and 7 respectively (P < 0.0001: Mann-Whitney U-test). VE was associated with less positive / more negative domain scoring post-assessment 12 and 6, respectively (P < 0.0001). Although RA made no difference to the perceived experience pre-VE (P = 0.9), post-VE, women with RAs considered VEs more acceptable than those without RA (P = 0.0022). CONCLUSION(S): This is the first study to comprehensively assess the acceptability of VE and intrapartum US. US assessment prior to delivery is more acceptable than VE. RA ameliorated the negative experience of the VE post-assessment

Extraneous menu-effects influence financial decisions made by pension trustees

Pension scheme trustees are responsible for the investment decisions of future generations’ retirement assets. However, behavioural finance research has mostly focussed on retail investors. While trustees are relatively sophisticated investors, they are not immune from biases. Across three experiments, we tested 252 pension scheme trustees for the influence of extraneous manipulations to the menu of options on investment decisions. Trustees were influenced by changes to the menu item mix, context, and layout. Care should therefore be taken when preparing information presented to trustees, in order to reduce biases that can be detrimental to pension outcomes

Tax evasion and exchange equity: a reference-dependent approach

The standard portfolio model of tax evasion with a public good produces the perverse conclusion that when taxpayers perceive the public good to be under-/overprovided, an increase in the tax rate increases/decreases evasion. The author treats taxpayers as thinking in terms of gains and losses relative to an endogenous reference level, which reflects perceived exchange equity between the value of taxes paid and the value of public goods supplied. With these alternative behavioral assumptions, the author overturns the aforementioned result in a direction consistent with the empirical evidence. The author also finds a role for relative income in determining individual responses to a change in the marginal rate of tax

Reference Distorted Prices

I show that when consumers (mis)perceive prices relative to reference prices, budgets turn out to be soft, prices tend to be lower and the average quality of goods sold decreases. These observations provide explanations for decentralized purchase decisions, for people being happy with a purchase even when they have paid their evaluation, and for why trade might affect high quality local firms 'unfairly'

Description and experience: How experimental investors learn about booms and busts affects their financial risk taking.

A few years ago, the world experienced the most severe economic crisis since the Great Depression. According to the depression baby hypothesis, people who live through such macroeconomic shocks take less financial risk in their future lives (e.g., lower stock market participation). This hypothesis has previously been tested against survey data. Here, we tested it in a simulated experimental stock market (based on the Spanish stock index, IBEX-35), varying both the length of historical data available to participants (including or excluding a macroeconomic shock) and the mode of learning about macroeconomic events (through sequential experience or symbolic descriptions). Investors who learned about the market from personal experience took less financial risk than did those who learned from graphs, thus echoing the description-experience gap observed in risky choice. In a second experiment, we reversed the market, turning the crisis into a boom. The description-experience gap persisted, with investors who experienced the boom taking more risk than those who did not. The results of a third experiment suggest that the observed gap is not driven by a wealth effect, and modeling suggests that the description-experience gap is explained by the fact that participants who learn from experience are more risk averse after a negative shock. Our findings highlight the crucial role of the mode of learning for financial risk taking and, by extension, in the legally required provision of financial advice

Transcriptional implications of intragenic DNA methylation in the oestrogen receptor alpha gene in breast cancer cells and tissues

Background DNA methylation variability regions (MVRs) across the oestrogen receptor alpha (ESR1) gene have been identified in peripheral blood cells from breast cancer patients and healthy individuals. In contrast to promoter methylation, gene body methylation may be important in maintaining active transcription. This study aimed to assess MVRs in ESR1 in breast cancer cell lines, tumour biopsies and exfoliated epithelial cells from expressed breast milk (EBM), to determine their significance for ESR1 transcription. Methods DNA methylation levels in eight MVRs across ESR1 were assessed by pyrosequencing bisulphite-converted DNA from three oestrogen receptor (ER)-positive and three ER-negative breast cancer cell lines. DNA methylation and expression were assessed following treatment with DAC (1 μM), or DMSO (controls). ESR1 methylation levels were also assayed in DNA from 155 invasive ductal carcinoma biopsies provided by the Breast Cancer Campaign Tissue Bank, and validated with DNA methylation profiles from the TCGA breast tumours (n = 356 ER-pos, n = 109 ER-neg). DNA methylation was profiled in exfoliated breast epithelial cells from EBM using the Illumina 450 K (n = 36) and pyrosequencing in a further 53 donor samples. ESR1 mRNA levels were measured by qRT-PCR. Results We show that ER-positive cell lines had unmethylated ESR1 promoter regions and highly methylated intragenic regions (median, 80.45%) while ER-negative cells had methylated promoters and lower intragenic methylation levels (median, 38.62%). DAC treatment increased ESR1 expression in ER-negative cells, but significantly reduced methylation and expression of ESR1 in ER-positive cells. The ESR1 promoter was unmethylated in breast tumour biopsies with high levels of intragenic methylation, independent of ER status. However, ESR1 methylation in the strongly ER-positive EBM DNA samples were very similar to ER-positive tumour cell lines. Conclusion DAC treatment inhibited ESR1 transcription in cells with an unmethylated ESR1 promoter and reduced intragenic DNA methylation. Intragenic methylation levels correlated with ESR1 expression in homogenous cell populations (cell lines and exfoliated primary breast epithelial cells), but not in heterogeneous tumour biopsies, highlighting the significant differences between the in vivo tumour microenvironment and individual homogenous cell types. These findings emphasise the need for care when choosing material for epigenetic research and highlights the presence of aberrant intragenic methylation levels in tumour tissue

Measuring the Behavioural Component of the S&P 500 and its Relationship to Financial Stress and Aggregated Earnings Surprises

Scholars in management and economics have shown increasing interest in isolating the behavioural dimension of market evolution. Indeed, by improving forecast accuracy and precision, this exercise would certainly help firms to anticipate economic fluctuations, thus leading to more profitable business and investment strategies. Yet, how to extract the behavioural component from real market data remains an open question. By using monthly data on the returns of the constituents of the S&P 500 index, we propose a Bayesian methodology to measure the extent to which market data conform to what is predicted by prospect theory (the behavioural perspective), relative to the (standard) subjective expected utility theory baseline.We document a significant behavioural component that reaches its peaks during recession periods and is correlated to measures of financial volatility, market sentiment and financial stress with expected sign. Moreover, the behavioural component decreases around macroeconomic corporate earnings news, while it reacts positively to the number of surprising announcements