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Testing for the Disposition Effect on Optimal Stopping Decisions

Jacopo Magnani ()

American Economic Review, 2015, vol. 105, issue 5, 371-75

Abstract: This paper develops a new laboratory test of the hypothesis that individual investors sell winners too early and ride losers too long. In the experiment, subjects invest in a risky asset, whose price evolves in near-continuous time, and they are provided with the option to liquidate it at a fixed salvage value. Optimal behavior is characterized by an upper and a lower stopping thresholds in the asset price space, thus producing a clear rational benchmark and eliminating known confounds. This design allows me to detect and quantify the disposition effect in a sample of 108 subjects.

JEL-codes: D14 D81 G11 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/aer.p20151039
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Handle: RePEc:aea:aecrev:v:105:y:2015:i:5:p:371-75