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Optimal stopping decisions and the disposition effect

Author

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  • Ahn, Yongkil

Abstract

I conduct lab-in-the-field experiments using a stylized optimal stopping problem, through which I separately identify the exact threshold values for the disposition effect in the gain and loss domains. I further combine the experimental results with actual account-level trading records. Remarkably, I discover that solely the disposition effect indicator within the gain domain exhibits a positive correlation with the actual disposition effect observed in the stock market. This asymmetry in financial decision-making between the gain and loss domains suggests that individual investors may render suboptimal decisions primarily when confronted with gains.

Suggested Citation

  • Ahn, Yongkil, 2024. "Optimal stopping decisions and the disposition effect," Journal of Behavioral and Experimental Finance, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:beexfi:v:42:y:2024:i:c:s2214635024000534
    DOI: 10.1016/j.jbef.2024.100938
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    Keywords

    Disposition effects; Optimal stopping; Lab-in-the-field experiments;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G40 - Financial Economics - - Behavioral Finance - - - General

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