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Portfolio framing and diversification in a disposition effect experiment

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  • Stephen L Cheung
  • Nathan Rogut

Abstract

We experimentally test an intervention designed to reduce investors’ disposition effect by prompting them to identify their worst asset, from the standpoint of its impact on future portfolio performance. We find that this intervention is mildly effective, and significantly more so for participants who correctly identify their worst asset, and/or sell the asset they identify. We also find that participants who correctly understand diversification in a financial literacy questionnaire exhibit larger disposition effects in the experiment. The latter finding raises concerns over the external validity of standard experimental paradigms used to study the disposition effect.

Suggested Citation

  • Stephen L Cheung & Nathan Rogut, 2024. "Portfolio framing and diversification in a disposition effect experiment," Working Papers 2024-17, University of Sydney, School of Economics.
    • Handle: RePEc:syd:wpaper:2024-17
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    Keywords

    behavioural finance; portfolio choice; disposition effect; diversification.;
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