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. To that end, I have stated I would not be surprised to see a pullback in the market at some point this year. Recent market weakness we’ve experienced in the past week may be the beginning of the pullback. Don’t let this scare you into selling stocks and abandoning a long-term investment strategy. Don’t become myopic and focus too much on what the market does on a daily, weekly or monthly basis. It’s impossible to time corrections and it’s a fool’s errand to try. I do not believe any market weakness we experience in the short-term is a harbinger of anything much worse, like a sustained bear market. This should be looked at as a buying opportunity if nothing else. The U.S. economy is stronger than media reports so keep your eye on the horizon and not the waves crashing on the beach.
Posted on: Thu, 22 Aug 2013 08:56:42 +0000
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