Narrow bracketers who are myopic in specific decisions would fail to consider preexisting risks in investment and neglect hedging opportunities. Growing evidence has demonstrated the relevance of narrow bracketing. We take a step further in empirical investigation and study individual heterogeneity in narrow bracketing. Specifically, we use a lab experiment in investment and hedging that elicits subjects’ preferences on rich occasions to uncover the individual degree of narrow bracketing without imposing distributional assumptions. Combining prospect theory and narrow bracketing can explain our findings: Subjects who invest more also insure more, and subjects insure significantly less in the loss domain than in the gain domain. More importantly, we show that the distribution of the individual degree of narrow bracketing is skewed at two extremes, yet with a substantial share of people in the middle who partially suffer from narrow bracketing. Neglecting this aspect, we would overestimate the severity of narrow bracketing and misinterpret its relation with individual characteristics.

This paper presents two studies on narrow bracketing and myopic loss aversion. The first study shows that the tendency to segregate multiple gambles is eliminated if subjects face a certainty equivalent or a probability equivalent task instead of a binary choice. The second study argues that the behavioral differences previously attributed entirely to myopic loss aversion are partly because long-term return properties are simply easier to grasp if the return information is already provided in the form of long-term returns rather than one-year returns. Both results may be related to recent failures to replicate myopic loss aversion. When the choice situation is structured in such a way that it draws respondents’ attention to the final outcome distribution and/or if severe misestimations of long-term returns based on short-term return information are unlikely, behavioral differences consistent with myopic loss aversion are less likely to be observed.