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Cut your losses and let your profits run: How shifting feelings of personal responsibility reverses the disposition effect

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  • Aspara, Jaakko
  • Hoffmann, Arvid O.I.

Abstract

The disposition effect refers to individuals’ tendency to sell their winning investments too early, while holding on to their losing investments too long. This behavioral bias has negative consequences for individuals’ wealth, because losing investments usually continue to underperform, while winning investments typically continue to outperform. The present research demonstrates that shifting feelings of personal responsibility can reverse individuals’ susceptibility to the disposition effect. In particular, results from three experiments indicate that the disposition effect is reversed when (i) prior investment gains are attributed to external factors while prior investment losses are attributed to individuals’ own faults, (ii) individuals invest someone else’s money instead of their own, and (iii) when individuals have an alternative, socially oriented investment goal, such as self-expression besides a financial gains goal. The results have implications for financial service professionals, such as financial advisors.

Suggested Citation

  • Aspara, Jaakko & Hoffmann, Arvid O.I., 2015. "Cut your losses and let your profits run: How shifting feelings of personal responsibility reverses the disposition effect," Journal of Behavioral and Experimental Finance, Elsevier, vol. 8(C), pages 18-24.
    • Handle: RePEc:eee:beexfi:v:8:y:2015:i:c:p:18-24
    DOI: 10.1016/j.jbef.2015.10.002
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    Cited by:

    1. Vanessa Martins Valcanover & Igor Bernardi Sonza & Wesley Vieira da Silva, 2020. "Behavioral Finance Experiments: A Recent Systematic Literature Review," SAGE Open, , vol. 10(4), pages 21582440209, November.
    2. Stivers, Adam & Tsang, Ming & Deaves, Richard & Hoffer, Adam, 2020. "Behavior when the chips are down: An experimental study of wealth effects and exchange media," Journal of Behavioral and Experimental Finance, Elsevier, vol. 27(C).
    3. Brunner, Fabian & Gamm, Fabian & Mill, Wladislaw, 2023. "MyPortfolio: The IKEA effect in financial investment decisions," Journal of Banking & Finance, Elsevier, vol. 154(C).
    4. Bachmann, Kremena, 2024. "Do you have a choice?: Implications for belief updating and the disposition effect," Journal of Economic Psychology, Elsevier, vol. 102(C).
    5. Kumar, Satish & Rao, Sandeep & Goyal, Kirti & Goyal, Nisha, 2022. "Journal of Behavioral and Experimental Finance: A bibliometric overview," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    6. Syed Aliya Zahera & Rohit Bansal, 2018. "Do investors exhibit behavioral biases in investment decision making? A systematic review," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 10(2), pages 210-251, May.
    7. Mohammad Tariqul Islam Khan, 2022. "Prior perceived losses and investment objectives after stock market crisis: a moderated-mediation model of risk tolerance and loss aversion," SN Business & Economics, Springer, vol. 2(7), pages 1-22, July.
    8. Dalla Costa, Aldo Fortunato & Mollica, Vito & Singh, Abhay, 2021. "Payment methods and the disposition effect: Evidence from Indonesian mutual fund trading," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    9. Richards, Daniel W. & Fenton-O'Creevy, Mark & Rutterford, Janette & Kodwani, Devendra G., 2018. "Is the disposition effect related to investors’ reliance on System 1 and System 2 processes or their strategy of emotion regulation?," Journal of Economic Psychology, Elsevier, vol. 66(C), pages 79-92.
    10. Zhang Enguang & Ma He, 2023. "An Empirical Study on Chinese Futures Market Based on Bollinger Bands Strategy and R," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 12(4), pages 1-1.
    11. Kahya, Evrim Hilal & Ekinci, Cumhur, 2022. "Disposition bias among Borsa Istanbul investors: What do we know about type, size and trading frequency?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    12. Gonzalez, Nichel, 2017. "Different investors–different decisions: On individual use of gain, loss and interest rate information," Journal of Behavioral and Experimental Finance, Elsevier, vol. 15(C), pages 59-65.

    More about this item

    Keywords

    Behavioral finance; Disposition effect; Household finance; Individual investors; Investment decisions;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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