Hyperbolic Discounting and Its Influence on Loss Tolerance: Evidence from Japanese Investors

Hyperbolic discounting, a key determinant of intertemporal behavior, captures individuals’ preferences for smaller immediate rewards over larger delayed ones. This study examined how hyperbolic discounting influences investment loss tolerance using a large-scale dataset of Japanese investors. Loss tolerance is defined as the extent of financial loss that an investor is willing to endure before changing their investment strategy. Although hyperbolic discounting shapes intertemporal investment decisions, its role in explaining loss tolerance remains largely unknown. Using a large dataset from the “Survey on Life and Money” comprising 107,294 observations and employing ordered probit regression, we found a significant negative relationship between hyperbolic discounting and investment loss tolerance: investors exhibiting stronger hyperbolic discounting are more likely to exit positions prematurely during market downturns, despite potential long-term recovery. The estimated marginal effect (−0.070 ***) underscores the economic significance of the association between hyperbolic discounting and loss tolerance. These results provide evidence that time-inconsistent preferences not only shape intertemporal choices but also reduce resilience to financial losses. The findings carry important implications for investors, highlighting the value of commitment mechanisms and education programs to counteract short-termism, and for policymakers seeking to design behavioral interventions that promote stable, long-term participation in financial markets.