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Hold on to it? An Experimental Analysis of the Disposition Effect

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  • Matteo Ploner

Abstract

This paper experimentally investigates a well-known anomaly in portfolio management, i.e. the fact that paper losses are realized less than paper gains (disposition effect). The existence of the disposition effect is documented in a simple risk task which demonstrates that the anomaly is most likely due to a higher degree of risk aversion of those experiencing a loss in a prior investment relative to those experiencing a gain. However, when an �emotionally colder� choice protocol is adopted, a reverse dispo- sition effect is observed. The results of the study may help design trading rules to overcome the pitfalls of the disposition effect.

Suggested Citation

  • Matteo Ploner, 2014. "Hold on to it? An Experimental Analysis of the Disposition Effect," CEEL Working Papers 1405, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
    • Handle: RePEc:trn:utwpce:1405
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    References listed on IDEAS

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    1. Jordi Brandts & Gary Charness, 2000. "Hot vs. Cold: Sequential Responses and Preference Stability in Experimental Games," Experimental Economics, Springer;Economic Science Association, vol. 2(3), pages 227-238, March.
    2. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    3. Ravi Dhar & Ning Zhu, 2006. "Up Close and Personal: Investor Sophistication and the Disposition Effect," Management Science, INFORMS, vol. 52(5), pages 726-740, May.
    4. Cheng, Teng Yuan & Lee, Chun I & Lin, Chao Hsien, 2013. "An examination of the relationship between the disposition effect and gender, age, the traded security, and bull–bear market conditions," Journal of Empirical Finance, Elsevier, vol. 21(C), pages 195-213.
    5. Camerer, Colin F & Ho, Teck-Hua, 1994. "Violations of the Betweenness Axiom and Nonlinearity in Probability," Journal of Risk and Uncertainty, Springer, vol. 8(2), pages 167-196, March.
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    Cited by:

    1. Marco Pleßner, 2017. "The disposition effect: a survey," Management Review Quarterly, Springer, vol. 67(1), pages 1-30, February.
    2. Alexia Gaudeul & Caterina Giannetti, 2021. "Fostering the adoption of robo-advisors: A 3-weeks online stock-trading experiment," Discussion Papers 2021/275, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.

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    More about this item

    Keywords

    Disposition Effect; Decision Making under Uncertainty; Behavioral Finance; Experiments; Prospect Theory;
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