INVESTORS’ DECISION TO TRADE STOCKS – AN EXPERIMENTAL STUDY

Uri Ben-Zion (), Sharon Shafran () and Tal Shavit ()
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Uri Ben-Zion: Dept. of Economics, Ben-Gurion University of the Negev, Israel
Sharon Shafran: (M.A.),Department of Management and Economics, The Open University of Israel

No 708, Working Papers from Ben-Gurion University of the Negev, Department of Economics

Abstract: This paper experimentally examines the behavior of investors when buying and selling stocks. This behavior was tested under different conditions, among them restrictions on asset holdings or different information conditions. Basic financial theory suggests that subjects buy and sell according to expectations regarding the future prices of assets. On the other hand, behavioral biases, such as the disposition effect, suggest that subjects are affected by past performance of assets. In a series of experiments, subjects were asked to allocate a given endowment among six assets. All the assets had the same normal distribution. The results show that when subjects were not restricted regarding the number of assets they were allowed to hold and were given information only on the asset they hold, the holding time for losing and winning assets was the same, indicating that there was no effect of past performance. On the other hand, when subjects were required to hold three assets at all times and replace one asset on each round, they tended to sell losing assets too soon and hold winning assets too long. The results also show that subjects who are given information on market returns tend to sell winning assets (relatively to the market) too soon and hold losing assets too long.

Keywords: Behavioral finance; Disposition effect; experimental economics; momentum; trading. (search for similar items in EconPapers)
JEL-codes: G11 G14 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2007
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Citations: View citations in EconPapers (1)

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