Behavioural Finance: The Literature Review of Myopic Loss Aversion

Abstract

Behavioral finance is a theory that tries to analyze the psychological bias that is less noticeable in the standard financial theory. In this theory, there are a lot of behavioral biases that occur in investors that can cause them to make costly mistake when making decisions. This article focuses on the most common, and the most costly, of all the biases that cause perfectly rational people to make irrational investment decisions that is Myopic Loss Aversion (MLA). The purpose of writing this article is to explain the MLA as a whole, their consequences, and how to avoid it. Myopic loss aversion (MLA) is a combination of the two theories, namely behavioral loss aversion and mental accounting. Loss aversion refers to the fact that a person will tend to be more sensitive to losses than profits. While mental accounting refers to a series of cognitive actions undertaken by economic agents in managing, evaluating, and maintaining financial activities.