Thaler and Bernatzi focus on how individual investors display myopic loss aversion compared to institutional investors, though short-term incentive schemes for institutional investors can also lead to this behavior. The paper examines pension funds and university endowments, finding that both are prone to myopic loss aversion despite long time horizons. Pension fund managers have short time horizons that prioritize avoiding short-term losses. University endowments also have spending rules based on moving averages that incentivize avoiding short-term market fluctuations over maximizing long-term returns.

1. harry daniels Page 1 4/3/2012
For the most part, Thaler and Bernatzi focus on the decisions made by the individual,
the private investor, as opposed to the organization; this may cause some reason for
debate as capital markets are largely driven by professional investors.
The question they posed is ‘Do Organizations display myopic loss aversion?’. We can
argue that institutional investors are less loss averse as they don't take the brunt of the
losses upon themselves, whereas the private investor will result in a direct loss of
welfare. We can argue against this with short-term incentive schemes for institutional
investors, which mean that short-term losses outweigh long-term gains and hence lead
to myopic loss aversion. The paper considers two important cases: Pension funds and
University endowments.
The most common type of pension plan is one where the firm promises each
vested worker a pension benefit as a function of final wage and years of service; for
these plans the firm and not the employees are the residual claimant. Consequently, if
the return on assets in the fund is high, the firm can make smaller contributions in the
future and vice versa. Pension funds are typically made up of 60 percent stocks and
40 percent bonds. Considering the historical equity premium and the infinite time
horizon associated with pension funds, why not invest a higher proportion in stocks?
Although there is an infinite time horizon associated with pension funds, the time
horizon of the fund manager is finite and will have to make regular reports regarding
the fund status. Consequently the time horizons are particularly short which creates a
conflict between the pension fund manager and the stockholders producing myopic
loss aversion.
University endowments are typically made up of an even split between bonds
and stocks, although are explicitly treated as perpetuities. The paper poses two
possible causes for myopic loss aversion, the first being similar to pension funds,
agency problems. Suppose a foundation wanted to make up the endowment fund
entirely out of stocks, arguing that with an infinite time horizon stocks would
outperform bonds. Again, however, the fund manager does not have an infinite time
horizon. Secondly, myopic loss aversion could be down to University spending rules,
where the spending budget is based on a moving average; this is to protect the fund
from fluctuations in the market. Consequently there is a choice between maximizing
the present value of spending over an infinite horizon and maintaining a steady
operating budget. The fund must structure their spending rules to facilitate a higher
exposure to risky assets.
Conclusion
Everyone.