Optimistic and Stubborn: An Experimental Analysis of the Disposition Effect

Carlos Cueva Herrero (), Inigo Iturbe-Ormaetxe, Giovanni Ponti () and Josefa Tomás Lucas ()
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Carlos Cueva Herrero: Dpto. Análisis Económico Aplicado
Josefa Tomás Lucas: Universidad de Alicante

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: The disposition effect (DE) is a common bias by which investors tend to sell profitable assets too soon and hold losing assets too long. We investigate psychological correlates of the DE in a standard experimental environment and find that subjects scoring high in optimism and stubbornness (difficulty recognizing one’s errors) tend to sell fewer losers and consequently exhibit a larger DE. We then test a beliefs-based explanation for these findings by conducting two additional treatments, called allocate (A) and choose (CH), in which we elicit price expectations after subjects are either randomly allocated assets, or forced to choose some, respectively. We find that subjects’ beliefs are more optimistic about assets that they own than about other assets, regardless of the treatment. However, while beliefs about owned assets in A adjust in line with Bayesian inference, beliefs remain stubbornly optimistic in CH even when an asset is more likely to be a loser.

Keywords: Behavioral Finance; Trading; Biases; Psychological Measures; Beliefs; Cognitive Dissonance (search for similar items in EconPapers)
JEL-codes: C91 D70 D81 D91 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2017-10
New Economics Papers: this item is included in nep-exp
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ivi:wpasad:2017-07

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