Disposition effect as a behavioral trading activity elicited by investors' different risk preferences

Isao Shoji and Sumei Kanehiro

International Review of Financial Analysis, 2016, vol. 46, issue C, 104-112

Abstract: This paper draws on numerical simulations to discuss the mechanism driving the disposition effect. The computational model is constructed from the basic ideas of prospect theory. The objective (or crude) rewards, obtained from investment, are transformed into subjective rewards via the value function proposed by prospect theory, which characterizes risk-aversion in gains and risk-seeking in losses. The optimal action is then chosen by maximizing the expected value of future subjective rewards. The results of numerical simulations of a finite-period optimal investment problem show that the disposition effect is given as its optimal solution, where the risk-seeking in losses is considered to play a key role in driving the effect.

Keywords: Disposition effect; Prospect theory; Different risk preference; Impulsivity for reward (search for similar items in EconPapers)
JEL-codes: D81 D87 G02 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:46:y:2016:i:c:p:104-112

DOI: 10.1016/j.irfa.2016.03.017

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