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Do the disposition and house money effects coexist? A reconciliation of two behavioral biases using individual investor-level data

Darren Duxbury (), Robert Hudson (), Kevin Keasey, Zhishu Yang and Songyao Yao

Journal of International Financial Markets, Institutions and Money, 2015, vol. 34, issue C, 55-68

Abstract: This paper uses investor-level data to examine jointly the tendency of investors to succumb to the disposition effect and the house money effect; two behavioral biases premised on seemingly contradictory responses to prior gains/losses. We document three novel findings. First, the two effects can contemporaneously coexist in a single stock market and the majority of investors (53.5%) simultaneously succumb to both effects. Second, we demonstrate the importance of distinguishing prior outcomes across two dimensions; unrealized/realized and stock/portfolio level. Third, we find that the house money effect moderates the disposition effect, suggesting that cognitive biases need not always have negative consequences.

Keywords: Behavioral biases; Disposition effect; Gains and losses; House money effect; Investor behavior; Mental accounting; Prior outcomes (search for similar items in EconPapers)
Date: 2015
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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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Handle: RePEc:eee:intfin:v:34:y:2015:i:c:p:55-68