Working Paper: NBER ID: w22605
Authors: Francis Larson; John A. List; Robert D. Metcalfe
Abstract: Behavioral economists have recently put forth a theoretical explanation for the equity premium puzzle based on combining myopia and loss aversion. Complementing the behavioral theory is evidence from laboratory experiments, which provide strong empirical support consistent with myopic loss aversion (MLA). Yet, whether, and to what extent, such preferences underlie behaviors of traders in their natural domain remains unknown. Indeed, a necessary condition for the MLA theory to explain the equity premium puzzle is for marginal traders in markets to exhibit such preferences. Using minute-by-minute trading observations from over 864,000 price realizations in a natural field experiment, we find data patterns consonant with MLA: in their normal course of business, professional traders who receive infrequent price information invest 33% more in risky assets, yielding profits that are 53% higher, compared to traders who receive frequent price information. Beyond testing theory, these results have important implications for efficient resource allocation as well as characterizing the optimal structure of social and economic policies.
Keywords: myopic loss aversion; equity premium puzzle; natural field experiment; professional traders
JEL Codes: C9; C93; G02; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Infrequent price information (P22) | Investment in risky assets (G11) |
| Infrequent price information (P22) | Profits (D33) |
| Frequent price information (E30) | Investment in risky assets (G11) |
| Frequent price information (E30) | Profits (D33) |