Does Prospect Theory Explain the Disposition Effect?

Thorsten Hens () and Martin Vlcek ()
Additional contact information
Thorsten Hens: Institute for Empirical Research in Economics, University of Zurich, Postal: University of Zurich, Institute for Empirical Research in Economics, Blümlisalpstrasse 10, 8006 Zürich, Switzerland, http://www.iew.unizh.ch/grp/hens/
Martin Vlcek: Institute for Empirical Research in Economics, University of Zurich, Postal: University of Zurich, Institute for Empirical Research in Economics, Blümlisalpstrasse 10, 8006 Zürich, Switzerland

No 2005/18, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: The disposition effect is the observation that investors hold winning stocks too long and sell losing stocks too early. A standard explanation of the disposition effect refers to prospect theory and in particular to the asymmetric risk aversion according to which investors are risk averse when faced with gains and risk-seeking when faced with losses. We show that for reasonable parameter values the disposition effect can however not be explained by prospect theory as proposed by Kahneman and Tversky. The reason is that those investors who sell winning stocks and hold loosing assets would in the first place not have invested in stocks. That is to say the standard prospect theory argument is sound ex-post, assuming that the investment has taken place, but not ex-ante, requiring that the investment is made in the first place.

Keywords: Disposition effect; prospect theory; portfolio choice (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2005-12-22
New Economics Papers: this item is included in nep-cbe, nep-fin and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://hdl.handle.net/11250/163748 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://hdl.handle.net/11250/163748 [302 Found]--> https://www.unit.no/brage-denne-lenken-er-ikke-lenger-gyldig [301 Moved Permanently]--> https://sikt.no/brage-denne-lenken-er-ikke-lenger-gyldig)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:nhhfms:2005_018

Access Statistics for this paper

More papers in Discussion Papers from Norwegian School of Economics, Department of Business and Management Science NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway. Contact information at EDIRC.
Bibliographic data for series maintained by Stein Fossen ().