What drives the disposition effect?

Zuchel, Heiko

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URL: http://ub-madoc.bib.uni-mannheim.de/2802
URN: urn:nbn:de:bsz:180-madoc-28027
Document Type: Working paper
Year of publication: 2001
The title of a journal, publication series: None
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Subject headings (SWD): Anlageverhalten , Wertpapierhandel , Portfoliomanagement , Entscheidungstheorie , Kognition
Abstract: Why do some investors tend to ''sell winners too early and ride losers too long''? Such behavior, labeled the disposition effect, has been attributed to biases in return expectations, time-varying risk-aversion based on the value function of prospect theory, and regret theory. I review these explanations and argue that none of them is satisfactory because they either fail to capture the disposition effect or because they are not supported by emprical evidence. I point out that there is a large psychological literature on entrapment, escalating commitment, and sunk cost that studies phenomena that are very similar to the disposition effect. This literature suggests an explanation of the disposition effect based on cognitive dissonance theory.
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