Splitting the Disposition Effect : Asymmetric Reactions Towards “Selling Winners” and “Holding Losers”

Weber, Martin ; Welfens, Frank

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URL: http://ub-madoc.bib.uni-mannheim.de/2284
URN: urn:nbn:de:bsz:180-madoc-22840
Document Type: Working paper
Year of publication: 2008
The title of a journal, publication series: None
Publication language: English
Institution: Business School > Sonstige - Fakultät für Betriebswirtschaftslehre
MADOC publication series: Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre (Weber) > Working Papers
Subject: 330 Economics
Classification: JEL: G12 G11 D81 D14 C91 ,
Subject headings (SWD): Kapitalanleger , Anlageverhalten , Entscheidung bei Risiko
Keywords (English): Decision analysis: Risk , Decision analysis: Sequential
Abstract: The disposition effect describes investors’ common tendency of quitting a winning investment too soon and holding on to losing investments too long. Since Shefrin and Statman (1985), the two sides of the disposition effect, i.e. “selling winners” and “holding losers”, have been assessed as one coherent bias. High-disposition investors are usually modeled to sell their winners quickly while almost never selling losers, while low-disposition investors are assumed to behave in the opposite way. Investigating both account level field data as well as data from a controlled laboratory experiment, we however show that individual investors’ reactions towards “selling winners” and “holding losers” are completely independent, meaning that the disposition effect is better depicted as two separate biases, investors’ “preference for cashing-in gains” and their “loss realization aversion”. Furthermore, investors’ individual preferences towards both sides are also stable over tasks and time so that both biases can be seen and modeled as individual personality traits.
Additional information: Available at SSRN: http://ssrn.com/abstract

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