The field of Behavioral Finance has helped us gain valuable knowledge into how human behavior can influence investment returns. Myopic loss aversion is one of the most important concepts to understand in order to keep you on a path to investing successfully. Until you understand it, you could end up making poor investment decisions that lead to poor returns. What is Myopic Loss Aversion? The concept of myopic loss aversion was first introduced by Daniel Kahneman and Amos Tversky in 1979. Myopia refers to a narrowing of a view – focusing on the most recent short-term results, even if the investment time horizon is 20-30 years.
Humans have a natural aversion to losing money, property or anything else they find value in. This helps us avoid scams, keeps us from over-spending and helps us save for a rainy day. Myopic loss aversion is different. It happens when we temporarily lose sight of the bigger picture and focus on what is immediately in front of us. For investors, this usually leads to panic selling during steep market declines such as normal, healthy corrections. Read more »