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Author Topic: Outside the Box HK trade system -- mathematician, poet, holistic hippie, dad  (Read 10964 times)

Online outsidetheboxhk

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Hello, thought I'd come over finally into a new topic area / domain.
And post about a frequent destructive pattern I have seen in this domain of Forex Trading, Trade Copying, and PAMM funds.

http://faculty.chicagobooth.edu/richard.thaler/research/pdf/MyopicLossAversion.pdf

After witnessing a lot of unproductive and sometimes downright abusive interaction between managers/providers and their subscribers/investors, and after reflecting on the human condition and my own life and career, my research came across a wonderful and pithy study entitled "Myopic Loss Aversion and the Equity Premium Puzzle, published in Feb 1995 in the Quarterly Journal of Economics thru the revered M.I.T. academic institution.
Myopic Loss Aversion (MLA) can be described as the tendency of investors who are loss-averse (the pleasure felt after observing a gain is inferior to the pain experienced after a loss of an equivalent size) to evaluate their portfolios too frequently. And thus make rash and poor investment decisions over longer periods of time (that fall outside their narrow focus until it is too late).
Complementing the theory behind MLA is a number of laboratory experiments that have found evidence consistent with it. The structure of these experiments revolves around varying the frequency of feedback to subjects, and examining if the information provision impacts investment patterns.
In general, the literature reports that individuals who received infrequent feedback invested between 30 percent and 80 percent more in the risky asset than individuals who received more frequent information, a pattern consistent with MLA.
To summarize their findings: Those investors, who are highly loss averse and frequently evaluate investment performance and rebalance investment portfolios, tend to have low equity holdings in their financial portfolios, which is likely to lead to utility losses over investors lifetimes. However, once individuals establish their portfolio allocations according to their levels of both loss aversion and myopia, myopic loss aversion is no longer associated with further decreases in their levels of equity investment. Our results support the suggestion that long-term investment vehicles (such as defined contribution pension funds) should offer default asset allocations with higher proportions of equities in order to provide potential for more gains from market participation across a broader range of investors.
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